DEFINITION of Path To Profitability (P2P)
The path to profitability is a clearly defined route to profitability as described in a business plan. The Path to Profitability (P2P) concept has become a focus area for venture capitalists and other early-stage investors such as angel investors to assess whether a start-up should receive funding, since the ultimate goal of any investment is to earn a profit on it.
The path to profitability is often outlined in a business plan or company vision, often using forecasted or projected figures and milestone markers that the firm is aiming to achieve in the future. The P2P may be visualized for stakeholders as a "roadmap" that plots the past and future progress of the company relative to reaching its milestones and how it has fared (or is expected to fare) in achieving them.
This term is not to be confused with the other P2P i.e. Peer-to-Peer (computing or networking, or transactions involving the sharing economy).
BREAKING DOWN Path To Profitability (P2P)
The path to profitability is typically interwoven throughout a company's business plan, with elements of it contained in various sections such as marketing strategy, strategic planning, and financial projections. The actual numbers are contained in the projected financial statements such as the Income Statement and Statement of Cash Flows.
A critical consideration of the path to profitability is that the assumptions and forecasts contained therein 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.
The newfound emphasis on P2P can be seen in the initial public offerings (IPOs) that have taken place in the bull market that commenced in 2009, especially 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 had either attained profitability or were on the verge of it. This represents a marked contrast to the numerous technology start-ups that had their IPOs in the first dot-com boom of the 1990s, when 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.