On The Road To Profitability

Nubia Capital

We are committed to investing in tech-enabled startups across Africa and helping founders grow extraordinary businesses.

Published Jan 25, 2024

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You are a startup and I am an investor. In 2024, if you can show and demonstrate to me your clear plans to achieve profitability, you have my full attention. Davidson Oturu, Managing partner at Nubia Capital, Ian Wijayan, Managing partner at Lizard and many other ecosystem directors believe that in 2024, it will be more important that you can achieve profitability

 This is the new game and this is how we got here. 

  1. How Venture Capital came to be
  2. The Psychology of Venture-backed Funds 
  3. Post-2021 valuations
  4. Uncertainties in the market and profitability 

Origin of venture capital 

The origin of modern VC can be traced back to 1946 with the formation of ARDC (American Research and Development Corporation). Formed by these four people, Massachusetts Investors Trust chairman, Merrill Griswold., Karl Compton, the president of MIT, Ralph Flanders, the president of the Federal Reserve Bank of Boston and General Georges F. Doriot, a Harvard Business School professor who is referred to as the father of venture capital, the ARDC was different and radical. They put to an end the process of pitching to wealthy families for investment and raised money from institutional investors in private companies. This was a game changer in the investment and entrepreneurial landscape. 

In the 1960’s, Arthur Rock and his peers came together to form a company called Fairchild Semiconductor which would go on to be the basis of the technology boom in the 1990s – 2000s. When he was coming out of Fairchild, he realised that many small companies needed capital to grow. Hence, he raised about $5 million from his network, launched the first VC firm in Silicon Valley, Davis and Rock and disbursed it to more than 15 companies generating $100 million in revenue. 

Today, Venture Capital has formed a solid rock for the entrepreneurial ecosystem involving investment in risky and earlier-stage companies in exchange for an equity stake in the company. 

But what does that have to do with profitability?

Venture Capitalists will often prioritise growth over profit. Why? That is how venture-backed funds work. 

Startups are riskier businesses and hence fail 7 out of 10 times. The winning investments must achieve 10x or better. To achieve this, they must grow very fast. 15 years of a slow-growing but profitable company is great but does not quite fit into the venture capital model. Jeff Bussgang, general partner at Flybridge, gave a perfect example of this on paper. He said, “If you model out three different growth rates – 100%, 50% and 25% –  for six years, then the fast-growing company has a shot at achieving venture returns”. He went further to say that “if the third company is growing at only 25% YoY, your firm will lose money–much money. These companies, because they’re slow growers, maybe only be worth 2x revenue” 

This means that naturally, VCs will push for faster growth over profitability. It is the guaranteed way to get returns but things are changing, and there is a market correction. 

According to TechCrunch, nobody thinks they are worth their 2021 valuation anymore. 2021 was a record year for VC investments. There was a whooping $600+ billion in the market and the unicorn level was more easily attainable. Imagine, London saw an increase in unicorns by 340%. Companies are often overvalued when VCs have a lot of money to push for fast growth. When interest rates are low and dry powder is low like it is now in 2024, VCs usually take more time to invest and thus focus on companies that have true and solid business models. 

This is why profitability is back. The economy requires and demands it. There is uncertainty in the market and now more than ever, it is obvious that fast growth is good but only with a more sustainable approach to profitability 

VCs will still love to invest in a company growing fast but not too fast and not too slow. VCs are prioritising growth and profit on a balanced scale.

How can you as a startup or founder tap into this?

Don’t be afraid to include on your pitch, the road to profitability, how fast/time required to get there, what you will be using the venture funds to do and how Vcs will get their money back. Do not overvalue your numbers, keep it simple yet attractive. 

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