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On revenue, gross profit, and profitability
A follow-up from last week's piece, The Billion-Dollar Revenue Club.
Welcome to issue #48 of next big thing.
This is a quick follow-up to last week’s post on The Billion Dollar Revenue Club.
One of the best parts about writing for me is the joy of getting feedback that improves my thinking, and I particularly enjoyed the feedback on this piece. For example, venture investor David Greenbaum of Quiet Capital commented on LinkedIn:
I feel like each of these companies have very different gross margin profiles so is revenue much better than valuation? Almost think the goal should be $1B gross profit or $1B net revenue.
There are two interesting questions to respond to here:
Is revenue much better than valuation as a goal post for companies to aim for?
Is gross profit or net revenue a better measure of “success,” or better goal post than gross revenue?
On the first question, the point of my last piece is that I believe the answer is “yes.” The $1B valuation that signified a Unicorn became the goal many companies were trying to achieve over the past decade. Companies that took that approach were mistaken. The goal should have been to build a strong and scaled fundamental business. And that’s why I felt it important to call out that companies reaching $1B or more in revenue are better companies for startups to look up to.
The second question raises a good point. As I explained last week, “revenue means something different for every company, what it recognizes as revenue (vs. gross merchandise volume, for instance), the margin profile of that revenue, the stickiness of that revenue, and more.” My favorite blog post on this subject is by Bill Gurley of Benchmark titled All Revenue is Not Created Equal. As a result of this, David’s comment is valid — a goal post around gross profit or net revenue is a better, more equalizing measure of companies’ scale, than gross revenue. There’s one key issue with this, which is that private companies may report their gross revenue publicly (or it may get leaked with highly credible sources), but gross profit is almost never shared publicly. This means that any discussion of a “Billion Dollar Gross Profit Club” would be limited to public companies.
But if we’re talking about success, and the ultimate north star for any business, why not go further than gross profit? My friend and venture investor Sarah Guo of Conviction tweeted the following this week:
A friend of mine who runs a multi-billion dollar public company with top-tier VC backing and faced activist investors over the cost structure of his biz, told me over coffee 5 or 6 years back: “Sarah, tell all the founders their job is to generate cash flow. No one told me.”
Ultimately this is what every business is working towards: profitability and generating cash. Of course we shouldn’t expect early-stage companies to be profitable, for they are investing in technology, sales and marketing, and more, in the hopes of scaling their businesses such that one day they can be profitable and growing companies. And profitability in and of itself isn’t a goal that yields to a massive venture-backed success. Which is why I still think that the best goal post for startups to think about trying to achieve is one around revenue (or gross profit, if we easily had that data available for private companies).
Thinking about these goal posts, I thought it would be an interesting exercise to look at the 64 public companies (referenced last week) that are the U.S. technology companies founded since 2003 with over $1 billion in revenue in the last twelve months, studying their gross profit, free cash flow, and EBITDA. Here are some findings (all metrics are last twelve months):
64 total companies with Revenue of $1B+ (U.S. public tech companies founded since 2003)
57 of 64 companies with Market Caps of $1B+
38 of 64 companies with Gross Profit of $1B+
44 of 64 companies that are free cash flow (FCF) positive
24 of 64 companies that are EBITDA positive (screenshot below)
7 of 64 companies with FCF of $1B+ (Meta, Tesla, Airbnb, Palo Alto Networks, Opendoor, Workday, Zoom)
4 of 64 companies with EBITDA of $1B+ (Meta, Tesla, Airbnb, Arista)
While this list is likely not comprehensive (e.g. I believe ServiceNow should be on this list, and am checking to find out why it wasn’t in the original screen — please let me know if you think of others), and omits companies domiciled outside of the U.S. (so Shopify and Spotify, for example, are not included, despite both being $1B+ of revenue and founded after 2003), my main takeaway from looking at this data is the following:
Very few tech companies end up being very large and profitable, twenty years after being started. Those that do are the ones we should celebrate, the ones worth looking up to, and very likely the ones that have built the next big thing in the course of their journeys to the most rarefied air.

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On revenue, gross profit, and profitability
Very interesting posts, this one and the previous one, Nikhil !
hi Nikhil,
I operate in a very different sector of the economy than your high tech folks. (I am a master carpenter, builder and author of five books, primarily about construction company management, for small volume builders).
So I was startled to learn from you that your glitzy hi-tech guys are immersed in the same fuzzy brained thinking that so often undermines my guys -- artisan builders with small companies. They are often pushed by the consultants they hire to focus on "growing" and to equate growth with revenue expansion rather than with growing the kind of financial strength that is realized by creating a lean and profitable operation, building up capital and successfully deploying the capital into profitable investments.
In my view, net revenue equals financial success. Nothing else does. I am even dubious about gross profit margin as a measure of success. I once heard a prominent industry consultant assure her audience of remodelers that if they produced 40% gross profit margins they were doing well. A member of the audience (a reader of my books as it happens) piped up and said something like "I don't get that. If your gross profit margin is 40% and your overhead is 38%, how in the heck does that equate to financial success." The speaker blew him off. Btw, Warren Buffett is also dubious about GPM as a measure of value of a company. It so obviously is not!!!
In our industry, building up of capital is crucial to long term survival -- not to mention achievement of financial freedom. When the economy goes into recession, construction goes into depression. From what I have seen, the ridiculously low survival rate of construction companies (less than 1% last over a decade) is due in good part to getting the big head during boom periods when revenue is growing, recklessly deploying possible profit into expanding overhead -- think $80K pickup trucks , or what I call the the "shiny truck syndrome".
What's the equivalent of shiny truck syndrome in your industry? David Sacks and his All In brethren hint at what it might be. They decry Founders continuing to throw capital around recklessly. For Chamath and David themselves it seems wine for one and fancy sweaters for the other. They tease Freidberg for being careful with money. Freidberg is the guy I would trust with my money.
Thanks for your thought provoking article.
David Gerstel
DavidGerstel.com -- Clear Thinking for Construction Professionals