The New Wave of Entrepreneurs in 2020

With Profitability as a Focus, How Will This Impact the Startup Scene?

Is your company cash flow positive? The pendulum is swinging back to sound financials and initial public offerings after you are profitable as we close the year with public market flops and insane financial hemorrhage in all corners of the startup world.

WeWork showed the world you can make a huge mess out of the company and still get paid billions for doing so. Uber made a big splash in the public markets and raised billions despite having nothing profit-making in their company. Oyo is drawing scrutiny for being the next possible WeWork as they become an awkward, clumsy conglomerate of sorts.

At the heart of it all is Softbank, with their Vision Fund about the size of Cameroon’s GDP (according to IMF estimates), drawing scrutiny on their accounting and startup bookkeeping.

This year’s public market debuts are marked with red, marred by insane losses through a combination of product diversification and market dominance strategies. Rather than go public directly, startups are increasingly opting for IPOs as means to raise funds.

Such a year drummed up anticipation for Airbnb’s direct listing/IPO: healthy financials, sound business model and consistently outcompeting others in their game. It makes sense, regardless of the decade-old startup’s intention, since they are most likely to perform well over the next few years.

As Goldman Sach’s chief U.S. equity strategist David Kostin said after an analysis of the public market: “…profitability by year three mattered for outperformance during all three cycles [after the public debut].”

With an uncertain economy looming ahead, the startup scene is about to get upended really quickly.

Profit First—Not Profitability

Airbnb’s ability to stay cash-flow positive whilst expanding is an indicator that startups can actually do so, especially if you are consumer-centric. Companies will stay private longer before going on the public market—in some cases, they might not even need to.

Not all companies will be like this though: biotech and health tech companies are known to be financial bloodsuckers. That’s for the right reason unless we get to see another Elizabeth Holmes.

Abolish Founder Worship

Founder worship will not be tolerated anymore as venture capitalists become increasingly picky about who they invest in and how much they invest in. Although many founders are amassing wealth and starting funds on their own—which might make them believe in a founder even more, since they were founders once—WeWork and Theranos are both great examples for them on what not to do with brilliant founders. Not everyone is Jack Ma or Elon Musk and it is important to recognize that.

What will this bring? Superclass shares with insane amounts of voting power will be contested. Founder-led funds are inherently more friendly towards founders in general, which will help diffuse the voting rights as everyone can contribute, within their own capabilities, to the startup’s growth. The board must have a voice too, lest you’d have companies helmed by the same CEO. Less power must be given to the founder: at the very least, the board must exercise prudence and discourage corruption of power early on.

Expand Later—Or Within Your Own Means

It seems like a no-brainer, but it will be a difficult decision for startups. Suppose you see an opportunity to expand and you have the war chest to do so: will you go ahead and trust that you can raise money later to compensate for all the bleeding you did?

Funds are getting tight, investors are getting picky. Not all startups will get to raise their next round from their previous investors. Eventually, the founders will end up with little to nothing, even though they toiled day and night to build the company.

Unique Business Model Focus

Everyone has ideas and startups will consistently pop up in every corner. There’s going to be less focus on the idea and more on the business model—which makes you think, can WeWork and Oyo innovate on their business model and revitalize themselves?

Business models have to be sustainable in the long run. It must also be scalable so that companies can establish market dominance across the globe. Airbnb seems to have succeeded in that part.