Back in 2015 (I couldn’t find a more recent study with the same data), The Information released a study of the percentage of US tech IPO’s in a given year where the company going public was profitable at the time of the IPO. The graph shows that 11% of tech IPO’s in 2014 were from profitable companies. This is the lowest level in history, even lower than that in 2000 before the dotcom bubble burst.

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Since this percentage is unlikely to have grown much in 2015 and 2016, The Information uses this figure as a potential signal that we’re facing a bubble similar to 2000.

Looking at the data as a tech investor in Turkey, I think there’s a much more interesting takeaway. Specifically, the percentage of tech companies in the US which were profitable at the time of IPO has averaged around 50% since 1980, and around 30% since 1995.

This data shows that even US public market investors who invest in large and mature tech companies don’t look for profitable income statements. We already know that early stage investors don’t, but the fact that public market investors don’t either is a very strong statement. The reason is because what matters is not a company’s current profit level, but that it has a path to profitability.

For example, a tech company that can acquire customers much more cheaply than the gross margin that it produces from serving these customers during their lifetime may be spending a lot on customer acquisition to take advantage of this positive unit economics dynamic. The result is that although the company is unprofitable for the time being, it has a clear path to profitability in the future.

Investors in Turkey often dismiss tech companies because their income statements show that they’re not profitable. This is the case not only for large and mature companies but even early stage companies that are growing very fast. This can be short sighted. There’s a difference between companies that are unprofitable without a path to profitability and those that are only unprofitable for the time being because they’re investing heavily in their future.

US public market investors show that even large tech companies that are unprofitable can be very attractive investments when you examine the reasons behind their unprofitability. If this is the case, the same must be true to an even greater extent for smaller and faster growing tech companies.

Also published on Medium.