Fred and Mark Suster and Brad Feld recently wrote posts around being profitable. Fred asked the question, “Should Your Company be Profitable?” and Mark asked the question “Should Startups Care About Profitability?” and Brad responding to this with Lessons From the Internet Bubble: Growth vs Profitability. All three probe something that people who are outside of the start-up world have been wondering about for years. My brother has framed the question to me many times….so how is this company going to make money?
Many of the companies that were built ten years ago were focused on “eyeballs” more than how they were going to make money. I have always believed that in the end, you have to figure out how to be profitable.
There are different stages of building a company from scratch. It takes capital to do that. If you are a start-up with a big vision then you build a product with the hope that it shows traction and then you can raise outside money to help fuel the growth. Money can continue to be raised over a series of different inflection points to continue that growth but at what point do you have to become profitable?
Some companies might not be profitable until they are so huge because of their small margins and need for a large workforce to execute on the product like Blue Apron. The information on their IPO is out there on the net and it appears that they need to become public in order to get to profitability. Yet if it works, they will employ tons of people and have created a large business.
I am involved in early stage companies that are going through the push-pull of growth from hiring the right team, trying to engage customers, getting margins to the right place, figuring out that traction that at one point will excel quickly. All these things take cash.
These days my advice to every company is to figure out how to become profitable sooner than later. Your investors might love you today but tomorrow they won’t be so sure that they want to put more capital in the business. You need a Plan B. If the capital dries up, and there is a real business there, know how to restructure quickly and become profitable. There are two reasons for that. One is it will keep your company alive and hopefully continue to grow. Second, while you are breaking even or showing profitability, you will own those conversations when you talk to the next round of investors. If you have to, you can walk away from the capital and build slower and if they want to invest then perhaps you won’t be diluted by a high number because when you are profitable, you are in power of your own destiny.