Since Serkan’s first book taught the fundamentals of tech entrepreneurship, his second will focus on analyzing the contributors to a successful startup ecosystem. As part of his research, Serkan will be traveling to Silicon Valley in January to interview entrepreneurs, venture capitalists, incubators, and other members of the startup community. I also had the chance to catch up with Serkan last week in a lengthy interview to share my experiences in the US and the resulting learnings for Turkey. The book will cover the interview in greater detail, but I wanted to touch on what I think is the most important question we addressed here. In particular, in light of most startups’ prioritization of growth over profitability, we discussed how much sense it made for VC’s to continue investing in growing startups which remain unprofitable even several years after their launch. As an investor, how do you decide if you should pull the plug?
Turkey is experiencing a rapid rise in tech entrepreneurship. I touched on some of the most recent trends and the tremendous promise which the industry holds in posts including Istanbul’s potential as a regional hub for tech startups, Rocket’s departure doesn’t change the strong long-term fundamentals of Turkey’s internet sector, and Yemeksepeti’s opportunities for geographic and adjacent business expansion. The fast paced growth of the country’s tech startups has contributed to the emergence of another exciting trend: experienced entrepreneurs authoring books to share their learnings and encourage new entrepreneurs. “Kaldirac Etkisi” (The Leverage Effect) by Ekim Nazim Kaya, cofounder of Botego, and “Dijital Girisimcilik Rehberi” (The Digital Entrepreneurship Guide) by Serkan Unsal, cofounder of Dakick, are two excellent books released in 2012 that teach the fundamentals of tech entrepreneurship to aspiring Turkish founders. Encouraged by the success of their first books, both Ekim and Serkan have already started to work on their second ones. If you haven’t gotten your hands on copies of the first books yet, I strongly recommend all Turkish entrepreneurs to take the time to read them over the holidays.
We can inform our answer to this question by considering the extreme example of when a startup has just launched. In this case, the startup almost always has negative operating cash flow. When you have a team developing a product, until that product is launched the team has expenses which need to be covered even though they don’t have any customers to earn revenue from. Why do seed stage investors back such a startup? Because they believe that it has a reasonable chance of building a sustainable business model which will eventually make money. Your business model is simply another way of saying how you make money. What value do you create and how much of this value do you capture? The behavior of later stage investors is no different than that of seed stage investors. As long as an investor believes that a startup is pursuing a business model with a reasonable path to sustainable profitability, it makes sense to continue investing. If this is no longer the case, you should pull the plug. But what constitutes a reasonable path to sustainable profitability?
The answer to this question is found in a discussion which we had at Romulus roughly two weeks ago. In fact, my response to Serkan which I outlined above was heavily influenced by the thoughts which I shared with the Romulus team when Sebastian asked the related question: “For how long can a business’ success be measured only in downloads and page views?” I’m directly pasting my reply here: “I like to think of companies in terms of their business model. If the business model makes sense there should be a path to profitability and the companies should be supported through investment … What defines a sustainable business model is in the eye of the beholder, and in the absence of market timing that’s what differentiates the good investors from the bad.” In other words, evaluating whether there is a reasonable path to sustainable profitability sits at the core of the VC business. As a result, deciding to pull the plug when this is no longer the case is among the most critical decisions that a VC must take.