2016 Investing Trends: Jet.com Sale Shows That Profitabilty Matters

Tech startups are learning the hard way that profitability matters to venture capitalists after all, at least within a reasonable time span. Aging bull markets tend to have that effect.

A year ago, Jet.com’s vision of single-handedly taking on e-commerce giant Amazon seemed like a pipe dream; six months ago, it seemed like there may have been a sliver of legitimate hope. When the one-year-old Jet was unable to raise the funds it deemed necessary to turn the profitability corner, it sold to Wal-Mart for $3.3 billion. The pipe dream of beating Amazon (or sliver of legitimate hope, however you chose to look at it) vanished.

It wasn’t hard to see an end to Jet’s independency coming---a $40 million per month cash expenditure, coupled with profits that didn’t pass muster, rendered Jet.com solidly unprofitable. Jet had long since ditched its $50 subscription fee, and although sales volume was high, CEO Marc Lore would have had to work a miracle to earn volume high enough to turn a profit with Jet’s business model. Jet simply wasn’t Amazon, and it didn’t have Amazon’s plan.

Speaking of miracles, Jet.com did get one after all: Wal-Mart’s $3.3 billion offer. Jet had been recently valued at $1.35 billion, so it’s difficult to see why Wal-Mart would place such high value on Jet.com, especially with Wal-Mart’s own e-commerce business ramping up. Either way, Marc Lore got the best deal he could hope for with Jet.

2016 has seen a startlingly low number of IPOs from tech companies (no doubt because of unsuccessful initial public offerings over the past two years). That being said, startups are being forced to either raise money in a tough capital environment or learn to be profitable on their own. Jet, with its $3.3 billion sale, was one of the lucky ones---many tech companies simply have to fold when profitability proves too elusive.

Tech isn’t the only industry suffering from wary investors. Dollar Shave Club, a viral video sensation from several years ago, sold to Unilever in July. The sale totaled $1 billion. How could the one-time social media darling startup sell out? According to the Wall Street Journal, the advertising cost of competing with Gillette simply took its toll. Dollar Shave Club couldn’t make a profit and had to sell. Hopefully tech startups will realize that investor money isn’t flowing as freely as it was 2-3 years ago---and when it does, that money flows towards proven profitable companies.

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