There’s a single variable that eventually determines a company’s success. This is its ability to generate sustainable profits.
As an early stage investor, it’s tempting to think about other variables when evaluating a startup. These include whether a startup will get follow-on funding or whether it will get acquired even if it doesn’t eventually generate sustainable profits.
While these variables are often part of the path to success, as in the case of getting follow-on funding, or can be an actual successful outcome, as in the case of getting acquired, they are not the outcomes that an investor should think about when investing.
The reason is that, in the absence of a company’s ability to generate sustainable profits, both of these approaches rely on finding a more foolish buyer.
The fact that such a buyer sometimes comes along doesn’t make this a repeatable and hence sound strategy.
Also published on Medium.