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What's Profitability Good For?

For an IPO, profitability doesn't always have to be the focus.

Often when a company submits its bid for an initial public offering, there is a flurry of discussion and speculation regarding whether the business is profitable and what kind of prospects it has for performance in the future. However, the obsession with profitability could just be a distraction

Often when a company submits its bid for an initial public offering, there is a flurry of discussion and speculation regarding whether the business is profitable and what kind of prospects it has for performance in the future. However, the obsession with profitability could just be a distraction for startups, Mark Suster writes in a column for Fortune.

"There is a healthy tension between profits and growth," Suster says. "To grow faster, businesses need resources in today's financial period to fund growth that may not come for 6 months to a year."

That's not to say that being profitable is unimportant for most companies, he notes, since it provides a lot more freedom - exit options, strength when fundraising, sustainability - than an organization that's dependent upon the generosity of strangers. The only businesses that shouldn't stay up late worrying about profitability are those who plan to build "internet-scale" companies or have investors who do.

On the investor side, David Sterman of Seeking Alpha also has some advice about profits and IPOs. He suggests that it's still possible to turn a profit on the IPO rush by following Wall Street reports on stocks that have not yet hit it big but have prices that are "near or below their IPO price."

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