I’ve written that even start-up companies need to have a revenue generation model.  The idea that ‘If you build it, they will come” is rarely successful outside of Facebook and LinkedIn.  Startups need to show how their future success prospects warrant investor confidence.  Operating profits are uncommon with startups since most of the time building the platform and audience devour what little profit is generated (and most often there are losses not profits).

Entrepreneurs can create enterprises that have operating profits.  This I know from experience as a company I started in 2000, YourCover.com, has managed to show a profit every year (well ALMOST every year), but the overall audience and sales are relatively modest.  It’s not an easy business to scale since the price point is low and the cost to attract attention in our category (personalized fake magazine covers) is very high.

A couple of weeks ago it was reported that the NBA’s Houston Rockets were sold for $2.2 Billion.  And as the NY Times reported “…the man who will be getting the big check is Leslie Alexander, who bought the team in 1993 for $85 million.”  24 years and an increase in value of $2.115 billion is staggering.  It’s a 2500% increase in value in case you are scoring at home.

Now we all know the Houston Rockets even in 1993 were not a startup.  In fact the team started in 1967 – as the San Diego Rockets – as a member of the old American Basketball Association.  They moved to Houston in 1971.  Over their history the Rockets have had bad, mediocre, good and two championship seasons. (Much to the chagrin of this New York Knick fan).  They’ve also had seasons where the team made an operating profit, came close to breaking even, and others where there was an operating loss.

Most recently Forbes reported  the Rockets, like many NBA teams are operating at a profit.  The huge NBA TV and marketing contracts have made this easier – as long as the team performs well on the hardwood. Even if NBA teams don’t perform well, their brand and reach afford them the ability to build their franchise value even when their on the court performance stinks.  As an example, consider my beloved Knicks who are valued at $3.3 billion – the most valuable NBA franchise.

Do ever-increasing valuations like the Rockets impact the way NBA (and other major sports) run their teams?  Think about it in this context.  If your company has a losing year but knows in the long run the valuation of the enterprise is increasing, that knowledge creates resistance to hitting the panic button in and after any particular season.  It’s sufficient to offer that most business owners do not have that luxury.

Clearly the long-term business prospects of professional sports franchises have increased for many years.  However the more recent stratospheric valuations far outpace those of the 1990’s and before.  Prior to this century, owners of NBA franchises were not playing with the safety net that has been created by worldwide distribution of their product.

Startups and pro sports teams are similar in the lack of a need for a year-to-year operating profit (think Twitter).  There are currently 30 NBA teams.  There are thousands and thousands of startup companies.  Investors are willing to take chances betting on the next Facebook.   When it comes to your company – you are the primary investor and have to evaluate the chances you are willing to take.

Startups are also dissimilar. For the few companies that have the audacity and ability to create a workable, and scalable growth model by spending money to add users to an already valued platform – good for them.  For the rest of us, building a company that creates an ongoing operating profit AND growth, is the only smart choice.