Updated: Sep 23
While things are starting to turn around both for the broader stock market and the startup investing world, investors are punishing unprofitable companies. In the venture capital world, profit can sometimes even be frowned upon because it means companies aren't reinvesting in their own growth. But when a company goes public, the market sees an 8 and 9-figure loss and knows shorting a wildly unprofitable tech stock is free money in the short to mid-term.
Much of this is done with the underlying belief that, at any time, the company can stop investing in growth and instead focus on becoming profitable then turn it all around. While is true in many cases, it's never as simple as it seems. That means cutting high-cost individuals, pushing employees to do more with less, cutting subscription services, and a host of other changes. This will not only result in a revenue decline in most instances (another bad sign) but also hurt the culture, and potentially key personnel at risk of leaving.
This is often a highly touted reason behind pursuing equity crowdfunding over venture capital. Venture capital has strict deadlines to meet and an ROI-focused mindset. Retail investors, while some might complain, largely do not. This means a company can scale profitability, even if it might take an extra year or two.
But it seems many startups might not be using this to their full advantage. According to Hubtas, less than 10% of startups conducting equity raises are profitable. Of the roughly 274 startups currently raising, only 26 are showing a net income based on their SEC filings.
With funds being increasingly difficult to come by, a follow-on funding round is not a guarantee. But profitable companies can at least sustain themselves until conditions improve and aren't at risk of going bankrupt. Even better, using Hubtas's screener, I can narrow it down even more by companies that fit my specific investing thesis.
One company that immediately jumps out is PSYONIC, Inc. The company makes bionic arms with the ability to sense touch. The startup is a leading startup in the bionics space, and has been featured in various publications multiple times for their incredible technology. Despite it being a futuristic startup, the company is actually highly profitable with incredible underlying financials. In 2021, PSYONIC had $652.8k in revenue and a loss of $441k. In 2022, they grew revenue 285% to over $1.7 million in revenue with a Net Profit of $75.8k.
The company was featured in the Crowdscale Newsletter, which broke down the market opportunity further. The newsletter noted opportunities that might not seem immediately clear, such as attaching the arms to robots to give them the ability to sense touch.