“Startups are understood to be unprofitable by most accounting standards because they’re reinvesting back into their business,” says Asher Rogovy, chief investment officer at Magnifina.
Full quote provided:
“Startups are understood to be unprofitable by most accounting standards because they are reinvesting any profits back into their business. Sometimes this means “buying revenue” with marketing dollars. Ideally, this revenue recurs and fresh marketing budget is spent finding new customers. Therefore, it makes sense to analyze gross revenue to measure how quickly the company is growing.
On the other hand, it makes more sense to look at net income for more mature companies. Because the endgame for equity investments is to pay a dividend, investors should analyze net income. Dividends are paid out of profits, so trends in net income could help predict the size of the dividend.”