Are VC Prophets Obsessed with Profits?

It’s not news that profits are the latest craze in the world of e-commerce and high-tech in general. Chances are you’re sick of hearing the word given the number of times it’s been uttered since the Nasdaq tried to buck loose all the profitless cling-ons earlier this year.

But the “p” word hasn’t lost its power. It’s inescapable. Look at the divergent fortunes of two e-commerce heavyweights during last week’s make-nice-with-the-analysts meetings.

Both Jeff Bezos of Amazon.com and Meg Whitman of eBay delivered remarkably similar forecasts. Fifty percent growth not out of the question, they said. E-commerce tide rising. Yet, eBay’s stock floated higher on the projections, while Amazon shares languished.

The big difference between the two companies, of course, is profits. eBay’s got ’em; Amazon wants ’em. And now, it seems, so does every investor, venture capitalist (VC), angel and analyst on the planet.

They want — they expect, even demand — an instant sea change in how emerging companies think and act. They want them to forget the way things were done just eight months ago and focus on making money.

There’s only one problem: They fail to recognize their role in creating a whole generation of cash-guzzling monsters who don’t know the magic words for changing into profit-bearing lambs overnight.

Out in the Garage

Guy Kawasaki’s incubator-angel-venture fund, Garage.com, cruises America’s silicon hot spots putting on boot camps for startups. The company crams 500 or so entrepreneurs into a ballroom and lets VCs and others tell them how it’s done.

Late last week, in Boston, the venture capitalists pounded the podium and spat the word “profit” more times than anyone in the room could count. Good advice? Of course. A young company needs a revenue model, needs to create a “pathway to profitability.” Sounds quaint, doesn’t it? Like a walk in the park.

The VCs at Garage.com’s show said things like: “Don’t lie to us!” and “Don’t exaggerate!” and “Show us the profits!” Again, solid advice from the people who hold the purse strings. But without some accompanying mea culpas, those admonitions have a hollow ring.

When are the early stage investors who gave the world such a dizzying glut of dot-coms in the past two years going to admit they made a mistake?

Hard To Say ‘Sorry’

It’s okay, guys. You’re only human. But until you come to grips with the fact that you helped to fuel the insanity, it’s going to be hard to get the budding entrepreneurs to change their ways. A little bit of self-flagellation could go a long way toward restoring some credibility.

How can you tell a fresh graduate with a start-up idea that profits are a must without providing some explanation for your history of backing half a dozen ventures that had no real chance of making it?

Sure, you were convinced that each was the next big thing. A more candid admission might be that you had no clue what the next big thing would be, so you invested out of defensiveness and fear. No one wanted to miss the boat on the next eBay.

This is not to blast the valuable VC community alone. The blame should be spread across the entire e-commerce landscape. Stock market investors who pushed dot-com shares to stratospheric levels should take some responsibility.

Analysts and journalists who failed to cast a wary eye on the explosion of companies — with clusters of look-alikes periodically blooming in the same space (toys, music and health care all come to mind) — should also be doing some penance.

End of Possibility?

The dream of unlimited possibilities seemed real for a while. The fact is, the possibilities were, and still are, endless. But just as profits should not have been ignored in the past, they should not be the only blips on financial radar screens today.

A pathway? Sure, that makes sense. But no matter how scary things get on the Nasdaq, investors should not suddenly raise the bar from “grow at your own pace” to “full profitability in X number of years.”

Anecdotal evidence suggests that startups are having a difficult time finding second round funding. The round one investors who were intoxicated by the dollar signs dancing before their eyes are suddenly clear-headed and skeptical.

That’s good, to a point. It’s tough to be left with nothing when a portfolio star bites the dust. But it’s even tougher — for everyone — when good young companies are made to suffer because of sins committed before they were born.

Everyone in the financial community should resist the temptation to blindly follow the latest investment trend. When any situation is painted in broad strokes, the details are glossed over — and God is just as likely to be dwelling there as the devil.

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