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Why are non-profitable startups still getting funded?

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Why are non-profitable startups still getting funded?
posted Jan 22, 2018 by Debolina Charaborthy

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1 Answer

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VCs are looking to make their money by buying shares early when a company's revenue is very small and then selling them later when the company's top line is much larger. They are looking for the capital gains of this sale not income from operations. So dividends undesirable and potential profit should be reinvested in accelerating growth instead,

When a company's top line has grown large and growth may be about to slow, they will sell as a nice price/sales ratio, or IPO, selling to new investors who believe rapid growth will continue or that by making operations more efficient they can turn more of that top line sales into bottom line profit.

VCs believe that the largest player in a market will ultimately earn a disproportionately larger amount of the profit in the value chain than smaller competitors, so it is important to grow real big real fast and starve all the competitors. Or else your company will be the one squeezed out.

For markets with network effects and high switching costs, there is strong evidence that an early lead in the number of customers can become a nearly insurmountable long term competitive advantage.

answer Jan 23, 2018 by Prachi