What Is Path to Profitability (P2P)?
The path to profitability (P2P) is a clearly defined route to profitability that is often described in a business plan. The P2P concept has become a focus for venture capitalists and other early-stage investors such as angel investors. It is used to assess whether a start-up should receive funding since the ultimate goal of any investment is to recognize a return.
In the P2P, pricing is the most powerful component because it determines revenues, the first line on the profit and loss statement.
The P2P is often outlined in a business plan or the company vision. The P2P often uses forecasted or projected figures and milestone markers that the firm is aiming to achieve. The P2P may be visualized for stakeholders as a roadmap that plots the past and future progress of the company relative to pre-set milestones and how the company has fared (or is expected to fare) in the future.
This term is not to be confused with the other term P2P, or peer-to-peer (computing, networking, or transactions involving the sharing economy).
Understanding Path to Profitability (P2P)
The P2P is typically interwoven throughout a company's business plan with elements contained in various sections of the marketing strategy, strategic planning, and financial projections. The actual numbers are contained in the projected financial statements such as the income statement and the statement of cash flows.
- The P2P outlines how long it will take a company to reach profitability.
- The P2P outlines the means by which a company will reach profitability.
- Investors want to see a company's P2P before they provide funding to help them assess the potential return on their investment.
- The P2P is often a component of a company's business plan.
A critical consideration of the P2P is that the assumptions and forecasts contained in the plan should be achievable and backed by solid data and analysis rather than wildly optimistic targets that may be impossible to meet.
The P2P timeframe will also vary significantly from one company to the next depending on the sector to which it belongs. While an early-stage technology company may have a P2P horizon of five years, a biotechnology start-up may be in no position to achieve profitability even after a decade.
Since the dot-com crash, investors are much more cautious when it comes to providing funding to startups, and today, investors want to see a well-organized business plan with a clear P2P.
The newfound emphasis on P2P is evident from the initial public offerings (IPOs) that have occurred in the bull market since 2009, particularly in the technology sector. Technology companies that have gone public in the second tech boom have done so at a relatively advanced stage when they were either already profitability or on the cusp of profitability.
The IPO market represents a marked contrast to the numerous technology start-ups that went public in the first dot-com boom of the 1990s. During the 1990s, business plans emphasized website traffic rather than profits. These companies burned through billions of dollars in capital before going belly-up. The new focus on P2P is a direct outcome of the 1990s dot-com boom-and-bust.