What? One of the advice is to get cash flow positive with the money you already have. Isn't that basic knowledge? You can't spend more than you have and you only ask for other people's money when you don't need it. Idk, maybe this is an american thing, with all the capital you have but here (Portugal) you can't get series A funding without being at least cash flow positive, no way.
The American VC market has been saturated and everyone with a spare dollar has been throwing cash into the market trying to find the next Google/Facebook/Twitter. A lot of institutional money started looking at the VC market as a way to maintain a 7-10% rate of return when traditional investment vehicles started going sideways.
You could get funding for a portable neighborhood pony washing service if you built an iPhone app backed by an AWS service and called it Uber for Pony Washers (or some such)if you looked hard enough.
As the article points out, this is changing. The boom part of the boom-bust equation is starting to flatline with IPOs happening less frequently and for less money and the institutional investors who get in later in the game to buy out the initial VCs being more gun shy about investing.
Net result for the market? Startups need to focus on being a functioning business generating positive cash flow rather than a money pit that occasionally generates a lottery ticket. Not everyone will succeed, but the changing economic climate will push a lot of the fair weather pony washing app founders out and leave the more seriously business minded people which should result in a new wave of solid companies capable of handling more strenuous economic conditions.
There's no inherent reason why being cash flow positive is such an important consideration for a venture capital firm.
A startup that's not cash flow positive right now but could be massively so in the future (or, atleast, the market expects it to be massively cash flow positive in the future) is significantly more valuable than a startup that is cash flow positive right now but with not a ton of room for growth.
In fact, placing the requirement of cash flow positivity right at the beginning of the startup would probably squash a lot of good (i.e. valuable in the long-er term) ideas.
How do you know that it will ever produce returns?
Valuations are made out of belief (whole cloth).
The requirement is not a must, but you should take into account startup's burn rate over funding, which should eventually turn into burn rate over revenue. (without taking extra funding into account)
So, a startup that would have a huge burn rate should be much less valuable, as you're liable to lose money both short and long term. Same as with the bets, taking large bets with long timeframes is more liable to turn you bankrupt (both VC and startup owner) than taking small bets often, since you can back out at any given time.
(I'm not talking about motivation, that's a separate thing.)
However, markets are not rational, so startups with high burn rate are considered very valuable for some reason.
Uber's financials leaked a few months ago. They lose millions of dollars per quarter. They were able to raise 10 billion dollars according to CrunchBase [1].
How about data at series B? A startup should become profitable pretty soon if it really has a handle on the market... If it doesn't after years, it's probably dead even if it's churning through money.
That might become the norm for the next few years in a slower VC market. But, at least in SV and NYC, it's been pretty common to raise multiple rounds before profitability.
Companies can choose to not be profitable on purpose though, by re-investing revenues back into the business. Heck, Amazon's basically never turned a profit.
