I have a hard time believing that bankers and investors, who should be knowledgable in business matters, would be so naïvely ignorant of such basic concepts.
I worked for eight years during high school and college for my father, a general contractor -- ie, light construction like home building, repairs, and remodels, store-fronts (eg, restaurants, take-out (AKA "carry away"), shops), etc. As such, he learned a lot about what new businesses had to deal with. Also, he required that I take business administration classes in college, so I took Accounting 101 where I learned principles that I still retain half a century later (even though I'd be hard pressed to reconstruct the entire structure of account types (eg, assets, liabilities, revenues, expenses) and in which kinds a credit or debit would be an increase or a decrease
* -- eg, when you buy a delivery van with a car loan, you increase your capital and also increase your liabilities, one of which is a credit and the other a debit, but I forget which is which nor do I really care).
One thing my father told me is that when you open a new business you must be prepared to operate (and live) for at least two years before you have any chance of making a profit. That is true even if you have the best product or service (eg, a really great restaurant that's filled with diners every day). He said that he had seen so many really good businesses die within a year because they had not planned for how they would survive that initial period of making no profit. And of course the longer it takes to build up your clientele the longer that initial dry spell will be.
Starting a business entails a lot of start-up costs. According to high school capitalism, those start-up costs are covered by selling stock to investors and by taking out bank loans, both of which will increase your liability accounts. Over time, you want to decrease those liabilities (and indeed are required to pay off some over time) -- in the case of stock, there's the old "51% rule" from the movies where you want to always own at least 51% of your own company's stock or else you no longer own that company.
Basically,
Profit = Revenue - Expenses. Revenue would come mainly from sales which depends on sale price times items sold (or whatever depending on your business). Practical reasons constrains how high your prices can be, because if they are too high then you won't sell as much. The factor which can vary the most would be the expenses, which would include fixed and variable expenses (variable including the cost of manufacturing each item)
as well as the expense of paying on your liabilties. The more your expenses are, the less your profit will be. Early in the business, expenses (especially the ones due to your liabilities) can very easily exceed revenues, leaving you in the red.
The word that keeps coming to mind is
amortization. For example, research and development (R&D) on a new product is an expense that yields no immediate revenue but is essential to the future of the company. That expense accrues until the product can come to market. At first, you need to sell that new product at a higher price, which includes a small percentage of the cost of development. Then over time as those development costs have been
amortized you can bring the price down. For example, a new drug is very expensive to develop (and test), so its initial price is high, but then over time the price can come down and much less expensive generic forms can start to appear -- CAVEAT: that's how it should work and does not account for predatory price-gouging of insulin, et alia.
So the need to amortize your start-up costs will keep your expenses high and your profit non-existent at first. Then after a few years you can start to creep up into the black.
But the banks and investors should know that already! What's wrong with them?
Another factor is in sales, which depends on gaining
and keeping clientele. My father remembered a downtown shoe repair shop (I grew up when all the major businesses were downtown; ie, before the Coming of the Malls). He had a good business with lots of customers, but then he moved quite literally across the street for a better deal on his rent. He lost nearly half his customers because of that move. Why those he lost couldn't be bothered to cross the street, we could not understand.
And in the case of a new business, it's going to take time to build up that clientele, especially if it's something new.
History Channel has a surprisingly interesting series:
The Food That Built America. Normal format looks at a particular type of food product (eg, donuts, fast food, cookies) and follows the founding and growth of well known companies as well as how those companies competed with each other. For example, Debbi Fields, AKA "Mrs. Fields", opened a stall in a mall food court to sell her homemade cookies, but everybody just walked past her. This was because this type of cookie was something new (Oreos and Hydroxes and all store-bought cookies were hard and brittle) and the idea of buying a single cookie was nothing that anybody had done. So she stood in front of her stall and handed out free samples to everybody, which started to bring in customers.
This is all just common sense, or should be.
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