The Importance Of Profitability: A Reality Check For Software Businesses

By Abby Sorensen, Editor

Imagine you were working at a software company with these financials. Give me your honest, gut-check reaction: Would you be excited or concerned about your future?

• $2.28 billion valuation since coming out of stealth mode in 2015.
• $700+ million raised from the likes of BlackRock, Greylock, Benchmark, and SalesForce.
• Recently filed for an IPO.

Of course you’d be excited! Your company is funded! You feast on free catered lunches and dinners every day in the office! Your own conference draws 3,000 attendees and features famous keynote speakers!

Now what’s your reaction to these numbers? Still excited?

• Overall loss of $176.6 million on revenues of $108.5 million in 2017.
• Overall loss of $183.1 million on revenues of $74.5 million in 2016.
• Total deficit of $803.3 million as of April 2018.
• $72 million in the bank, out of credit, and ready to start slashing costs in three to four months unless more capital is found.

Yikes, you should be concerned. Your runway is looking pretty short. Shelling out so much cash on fancy company parties seems foolish now. Profitability doesn’t appear to be on the horizon, and it might not even be in this solar system.

This software company isn’t hypothetical – much has been written about its decision to go public. Its penchant for securing funding from big names means next to nothing unless they start demonstrating real progress towards profitability. Its revenue growth is clouded by an enormously high CAC.

I recently added a new club to my golf bag — a Ping G400 5 wood to be exact — and it means next to nothing unless I start making more birdies. It feels like the right thing to improve my golf game, but that feeling is irrelevant unless my handicap continues to drop. When we’re talking software financials, we shouldn’t lose sight of the end goal of profitability (just like I shouldn’t let buying fancy new equipment stop me from practicing enough to continue to improve my golf game).

There isn’t a singular answer for how to grow a software business the “correct” way. In fact, our August/September issue features very different opinions on this. On page 12, Jay Valentine offers a scathing criticism of VCs. Then on page 26, You Mon Tsang goes as far as calling VC dollars “magical.” We wrote about a startup being funded by its founder’s savings account, and about a company that raised upwards of $100 million, went public, and then went private when it was acquired by a PE firm for nearly $1.79 billion.

We’ll continue to discuss the best path for growth later this month on Aug. 28 in Brooklyn when we host our Software Executive Forum. One of the sessions I’m most excited about is “Financing Software Growth The Smart Way,” which includes a panel of founders and CEOs who have bootstrapped their companies. Our goal is to provide a unique setting to network with leaders of software companies. Now’s the time to insert my shameless plug to attend this event: Use the promo code ABBY for a free registration. I hope you’ll join me in Brooklyn (or in San Francisco on Oct. 30) to continue the conversation with your peers about the best way to grow your software business.