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Revenue is easy, profit is harder

edge.ceo

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Re: Revenue is easy, profit is harder

#61

Post by ivan_gammel »

maCDzP wrote: post #52

So I am a Silicon Valley outsider. I live in the northern EU and work with project management in the construction industry representing the owner. It’s mostly infrastructure, roads, water. Old industry, conservative, we basically hate new things. On my spare time I tinker with my computer, learn assembly or whatever. Hence HN. I have recently started a course in corporate finance at my local uni because my new role r…

Let’s say you distribute X million € to X startups (each one gets 1M) and you know that on average one of them will yield 2X in 5 years and the rest will just burn the money and die. This seems to be a good investment, right? You only need to pick those startups carefully. It appears, the criteria of selection may be quite different from what you would look at if you were to provide those money as a loan. I’m not sure how VCs really make their decisions, but this is just a case of having a good risk model based on variables that matter the most.

Re: Revenue is easy, profit is harder

#62

Post by hinkley »

The number of times I’ve worked at a place where some sales asshole was trying to land $1 of revenue that was going to cost us $2.50 to achieve the deliverables… wtf are they teaching in business school?

One place I worked, their strategy was to chase the “whales” first and get them as customers so we could use them to get other customers. So many problems there that only because apparent to these idiots afterward. First, big companies aren’t idiots. If you have next to nothing to offer, they’ll give you next to nothing in return. And once you have an exploitative contract, good luck renegotiating it once your product has improved.

In this particular industry it was even worse, as we found out. The big companies felt like they were doing people a favor, the medium sized companies were just cheap. Only the little companies were hungry and humble enough to pay good money for good product, but now you have a product that’s been tilted toward the whims of much larger companies, which adds a lot of friction. Plus you’ve done all of your scalability work at the beginning when you are the least experienced with it.

They did end up selling the company at a profit, but they had hoped for early retirement and all they got was comfortable living. I’m not convinced the buyers got a good deal on the terms either.

Re: Revenue is easy, profit is harder

#63

Post by crenwick »

maCDzP wrote: post #52

So I am a Silicon Valley outsider. I live in the northern EU and work with project management in the construction industry representing the owner. It’s mostly infrastructure, roads, water. Old industry, conservative, we basically hate new things. On my spare time I tinker with my computer, learn assembly or whatever. Hence HN. I have recently started a course in corporate finance at my local uni because my new role r…

I think you’re right on most accounts.

Yes, articles like this seem rudimentary to folks with MBA/accounting backgrounds.

Yes, tech startups can get millions in seeds funding, even where the company doesn’t have a CFO (or anyone with an MBA).

However, at those super early stages for sw startups, it doesn’t really matter. The money is to finance a product, prove the product’s value, and build a team. And its that journey where that company may start looking for a CFO.

By the time that company is raising a series A, they should have these things worked out.

Re: Revenue is easy, profit is harder

#64

Post by Ekaros »

wpietri wrote: post #21
grogenaut wrote: post #18

Earlier quoted context omitted.

Amazon typically isn't spending the lion share on user acquisition, it's plowing it into expansion and infra. Most recent issues/losses were due to a massive investment in physical fulfillment centers due to pandemic demand.

I agree with what you say, but your tone to me sounds contradictory, so I'm puzzled. Amazon "plowing it into expansion and infra" sounds exactly like "they prioritized growth", doesn't it?

The key point to takeaway might be that it is different to invest in things than it is to essentially dump your product to gain market share or customers. First is building datacentres, ware houses and so on. Later would be providing services like taxis below cost.

With infra, you still have the stuff next quarter and following quarters. With later it is already gone.

Re: Revenue is easy, profit is harder

#65

Post by erenyeager »

maCDzP wrote: post #52

So I am a Silicon Valley outsider. I live in the northern EU and work with project management in the construction industry representing the owner. It’s mostly infrastructure, roads, water. Old industry, conservative, we basically hate new things. On my spare time I tinker with my computer, learn assembly or whatever. Hence HN. I have recently started a course in corporate finance at my local uni because my new role r…

My understanding as someone who worked in SV is that there’s a lot of buzz in the area around new technologies and people are always doing something interesting/revolutionary/whatever. There are investors who diversify their portfolio by investing in multiple high risk high reward investments like these startups. So even if you invest in 100 companies and 99 fail, the one that succeeds might be that unicorn that pays off.

Concurrently, there is a greater understanding that waterfall engineering is not the best for software. Instead, software is more agile, in that you build test prototypes and have a tightly integrated feedback loop instead of huge project plans that take months to even reach market.

The philosophy is more around testing market hypotheses quickly and iterating quickly.

Another factor is there is a lot of hype around SV that forms a positive feedback loop. Of course investors are not so easy to part with their money but it is inclining towards gambling in some fields flush with capital.

This is not true for all fields in SV though, for example in the biotech and medtech field, getting investment is much harder from my experience, as there are more regulatory factors, higher barrier to startup, longer time periods for outcomes, etc.

Re: Revenue is easy, profit is harder

#66

Post by samcheng »

maCDzP wrote: post #52

So I am a Silicon Valley outsider. I live in the northern EU and work with project management in the construction industry representing the owner. It’s mostly infrastructure, roads, water. Old industry, conservative, we basically hate new things. On my spare time I tinker with my computer, learn assembly or whatever. Hence HN. I have recently started a course in corporate finance at my local uni because my new role r…

I live and work in Silicon Valley, and I agree that the concepts in the article are pretty elementary and critical to understand in any business, not just tech.

However: if your software product has struck gold, it will have “rocket ship” nearly-free growth and negligible incremental costs. In that regime, only the top line really matters. This is the kind of home run that many people are looking for in Silicon Valley, both founders and investors, which explains the relative “traditional” financial illiteracy in startups around here.

Re: Revenue is easy, profit is harder

#67

Post by elefanten »

JumpCrisscross wrote: post #56
maCDzP wrote: post #52

So I am a Silicon Valley outsider. I live in the northern EU and work with project management in the construction industry representing the owner. It’s mostly infrastructure, roads, water. Old industry, conservative, we basically hate new things. On my spare time I tinker with my computer, learn assembly or whatever. Hence HN. I have recently started a course in corporate finance at my local uni because my new role r…

> a lot of theses articles are pretty basic corporate finance One take: yes, and venture-backed companies often forget or ignore the basics of corporate finance. Another take: orthodox corporate finance isn’t tailored for start-ups. If you’re developing a product, GAAP income is meaningless. So we bootstrap interim financial metrics, e.g. eyeballs and ARPUs and DAUs (oh my!). In truth, the latter dominates at the ear…

I'll add to this a quote that is (purportedly) native to gp's northern EU: "Do you not know, my son, with how very little wisdom the world is governed?"

Re: Revenue is easy, profit is harder

#68

Post by simonswords82 »

hinkley wrote: post #62

The number of times I’ve worked at a place where some sales asshole was trying to land $1 of revenue that was going to cost us $2.50 to achieve the deliverables… wtf are they teaching in business school? One place I worked, their strategy was to chase the “whales” first and get them as customers so we could use them to get other customers. So many problems there that only because apparent to these idiots afterward. F…

Often this happens when a sales commission structure is misaligned with company profitability.

The salesperson then cares more about commission and less about profit and generates revenue at any cost.

Re: Revenue is easy, profit is harder

#69

Post by [deleted] »

renewiltord wrote: post #59
maCDzP wrote: post #52

So I am a Silicon Valley outsider. I live in the northern EU and work with project management in the construction industry representing the owner. It’s mostly infrastructure, roads, water. Old industry, conservative, we basically hate new things. On my spare time I tinker with my computer, learn assembly or whatever. Hence HN. I have recently started a course in corporate finance at my local uni because my new role r…

Think of it like this. If you're a big fund you want a portfolio diversified in industry and risk. If the guys CalPERS allocated the 0.5% (a few billion) to (the VCs) decided to also not do the risky thing then you haven't got a diversified portfolio. The point is to put a small amount of your phenomenal wealth into risky bets with outsize returns precisely because you want to capture some of that other risk diversit…

[deleted]

Re: Revenue is easy, profit is harder

#70

Post by JohnFen »

This reminds me of an exchange I had with someone who wanted to enter into a business deal with me. He bragged about how his company had X millions in revenue. Since revenue was a meaningless figure to me in this context, I asked what their profit margin was. After hemming and hawing about it, he admitted the company was not profitable, and it became clear it was unlikely to become profitable anytime soon.
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