The Importance of Profits

Profits are morally neutral. Turning a profit is not evil. It’s the only method by which a business can calculate whether or not its service provides utility.

When a company loses money, it signals to the owners that behavior needs to change to meet the demands of the market.

People only pay for goods and services that are worthwhile to them. Merely because your service produces something and that it took labor to create is no guarantee of how worthwhile it is.

No matter what they teach you in schools, that’s the case.

In addition, the fact that a company may be profitable is not necessarily a guarantee that it will return value to shareholders in the long run. While price-to-earnings ratios are historically quite high, it’s questionable as to whether or not that state of affairs will continue in the future.

It’s currently far more popular to attempt to garner investor attention without first generating some kind of sustainable business model. I find this myopic. It seems backwards to me. It’s fairly trivial to create something highly addictive but unprofitable. Furthermore, if your product ultimately cannibalizes your user base, it can harm your ability to earn money in the long run.

Culturally, American businesses are still greatly affected by the many success stories of the 1990s in equities. It was possible for so many owners to become multi-millionaires or billionaires by taking fundamentally unsound companies public. The owners and intermediaries became wealthy, but many shareholders were wiped out. The regulatory backlash manifested itself in Sarbanes-Oxley.

My question is – for entrepreneurs – which would you prefer? Are you in business just to accrue green paper and status, or are you motivated by a desire to create companies of lasting value? I think I know which choice results in greater satisfaction and a stronger surrounding culture of capitalism.

The public markets have become more wary compared to the past. It’s impossible to ignore the over-leveraged status of many institutional investors, an unstable political environment, and modern governments with unsustainable debt burdens.

The Federal government is on a hair-trigger in regards to financial regulation. The world is aching for innovative solutions to pressing social problems that central planning has no means to provide for.

Here’s my proscription, that I give to my clients: focus on providing a service that people will pay for first. Generating users and metrics merely to induce investors to part with cash is ultimately self-deluding and self-destructive. It generates more risk than is necessary. It breeds poor habits among employees and contractors.