I recently saw a video from YC. It was a YC alumni talking about 'Growth vs Profit', and she was rationalizing about how focusing on growth first and having a 'plausible profitability story' is enough. She goes on to conclude that focusing growth is more important than profitability. This is where my alarm bells started to go off. When she talked about profitability it just felt like it was an after thought. Maybe for her story and the kind of company she wanted to create having 'growth at all cost' works. However many people who watch those video may get the wrong idea and put themselves into a trap, and leave a bad taste in their mouth. I wanted to take this opportunity to share some thoughts I have on this topic.
If you are someone who wants to build cool products and solving problems you truly care about, while retaining control over your destiny. Then this post might just be for you.
Making profits an after thought may work, if you are trying to appeal to investors. However if you are starting a company to appeal to investors you might as well stop and just go work for an existing company that may be closely related to what you're passionate about already. You'll have a much better time.
The core purpose of starting a company is to solve problems by building products people want. My view on this topic is working towards profitability will ensure meaningful growth. You have to work towards profitability by growing, each customer you on-board should get you closer to breaking-even. Your company will grow because you want to be profitable.
Because you are profitable you can CHOOSE to re-invest some of it back to continue developing your products and services which will in-turn bring in more growth. They are symbiotic. Much like sunlight and life on earth.
Meaningful Growth, Mindful Execution
If your products or services have real value for your customers, and truly solves their problems you should be able to price it at a point where after a certain amount of sales / units, you will make profit or at the very least breakeven. Your customers should be willing to pay a price that will allow you to generate profits. Because your products / services has truly made the lives of your customers better they'll want to pay so you can stick around. They want you to support the products you put out. They'll look forward to what you'll produce next.
Your whole execution strategy will be geared towards what I label as 'meaningful growth'. When profitability is important to you as a founder, you'll execute mindfully. You'll think carefully about every hire. Every purchase you make will need to be truly meaningful. You'll want to make sure that you are getting your money's worth because you know at the end of the day you'll need to at the very least breakeven to cover your costs. You'll develop good spending habits that will lead you to profitability. Simply put, executing mindfully makes profitability more viable. You'll work hard not to incur costs you don't need. You'll operate a truly lean, mean growth machine. You'll make it a point to only have everything that you truly absolutely need to build your company, nothing more, nothing less.
When you succeed at charging a fair price, you'll have found 'product market fit'. This means you can eventually sustain yourself, you can pay your employees and continue to power the growth without putting in more investment money. This should be the goal for every company that exists. Build products customers want so you can earn a profit.
Customers vs Investors
When entrepreneurs convince themselves that profits is not important they are cheating themselves. This leads entrepreneurs in most cases I've seen to executing on strategies that do not return real value and meaningful growth for the company. They generally overspend, lose focus, and they scramble all over the place and try to do too many things because they need that exponential growth that investors are looking for. They're running after investors (money) instead of iterating on products customers want and have investors (money) run after them. They need that next hit of investment constantly.
I've met many entrepreneurs and founders who chase investors tell me something along the lines of "my time is spent talking to investors not working on product". My question back to them is, then what's the point? The whole point of starting the company is so you can spend most of your time working on something you are passionate about, a product or service that gets you excited, that your customers want and are willing to pay you for it. Entrepreneurs should be spending most of their time building and selling products and making their customers happy, not chasing investors.
Entrepreneurs who overlook profits are like an overweight person refusing to change their lifestyle and using pills or surgery to lose weight. While they're on the pill their weight is going down (growing in vanity / fake made up metrics), but because they never adjusted their behavior and lifestyle when they go off the pill or leave the hospital after surgery, they continue eating and living the same way. Their weight slowly goes back up overtime (when they cannot subsidize growth anymore because they run out of investment money) because the real work of changing their habits or figuring out a better lifestyle was not done.
Producing profits require developing good habits. Figuring out product market fit by iterating, spending less than you earn, knowing exactly what the company needs and executing on the important things, so you don't incur costs on things the company doesn't need.
The contrasting experience of spending money wisely to create innovative products and services while trying to be profitable is what makes an entrepreneurs grow. In fact the ability to generate a profitable enterprise is the number one goal for anyone I label as 'entrepreneur'. Finding the right balance, and working through this challenge is what defines the success of an entrepreneur. By making profits an after thought you're removing the most important factor in the entire journey.
Companies that lie to themselves and only try to achieve growth without putting profits first will strive only to achieve growth in meaningless fabricated numbers. They'll fake metrics and numbers to make it look like they're growing, while masking the fact that no one really wants their products or services. What's worse is they'll focus on the wrong parts.
Imagine this, you have an e-commerce platform, you know your only way to achieve growth in the short-term to attract investors is to sell products on your platform at a loss. Because that's what people want, buy cheap things. So you sell all the goods in your store at a loss to out-do the competition. Instead of taking the time to figure out how to innovate on your product to make you better than your competitor, you execute a strategy that makes no sense, but only because it will give you numbers investors want to see.
Instead of building your platform into serving digital products or charging a subscription for something innovative you've developed, you've resorted to the quickest way to achieve growth because your investors are asking for those numbers. Does this sound familiar? I've seen too many entrepreneurs fall for this trap.
Start-up vs Small Business
I've seen this argument way too many times. Companies that focus on 'profits' are not a start-up, they're small businesses. This is a gross misunderstanding and has caused so much confusion and delusions. What defines whether you are a 'small business' or a 'start-up' is in the very nature of what the company does. It has nothing to do with whether you are profitable or not. I'll give you some examples.
If you operate a barber shop or a restaurant, you'll hire some people rent out some space and start. You can be profitable as long as you earn more than your expenses. This means you'll charge a certain price for your service and you'll work towards attracting as many customers as you can service while maintaining quality to ensure your customers are happy. Since you are confined to the space you physically operate in you'll only make a finite amount of profit every month, unless you physically grow. Growing your barber or restaurant means you'll need to pay more rent, and pay more employees, so your costs grow in proportion. In cases like this you are a 'small business'. Mind you many 'small businesses' have ended up in the stock markets. It all really depends on how savvy the founder is and how far they want to grow. So don't let the word 'small' diminish the value of 'small business' in anyway.
Now let's talk about 'start-ups'. Start-ups are generally businesses that DO NOT have costs that grow in proportion with how many customers they can service. Companies in this categories are mostly tech companies for a reason. They're not confined by the physical limits but more confined by their technical abilities to innovate and improve their products. Since their primary foundation for servicing customers are through software and automation. They can hire 10 people, rent cheap office space, or work out of a garage but service 1,000,000s of customers.
Basecamp is a company of around 20-50 people but service hundreds of thousands of users. They're not confined by the physical space. Their challenge is very different. They need to develop software products or services that help improve people's lives in some way. Customers never actually need to meet face to face with employees of these companies yet they get immense value from products and services they provide. At least for me this is the defining factor of a 'start-up'. Start-ups can very well earn profits while growing their businesses. Profitability and start-ups are by no means mutually exclusive.
Investment is not Revenue
I've seen too many entrepreneurs delude themselves into thinking that investment is equivalent to revenue, whether knowingly or not knowingly. I look for certain red flags to see if entrepreneurs of any given company fall into this trap.
They celebrate getting money from Investors
Getting money from investors doesn't mean you've achieved anything as far as the company / product market fit is concerned. All you've achieved is you've convinced someone to give you money based on a promise that you'll figure out the product market fit and you'll be growing at a certain rate. While having large amount of money flowing into an account you control can be exhilarating do not forget that there is a promise to be delivered. Most of the entrepreneurs do not understand what they are getting themselves into. You've also given up a part of your company in exchange for that money. If you keep asking for money you keep losing parts of you company and eventually you'll lose control and become just an employee.
Revenue signifies relationship between company and customer. It is distinctively different from investment. Revenue is money that the company has earned. Companies can use revenue to pay bills and anything left over belongs to the founders and share holders. Founders don't give up control in exchange for revenue. In fact quite the contrary, revenue strengthens control of the founder over the company, since it is evidence that the company is growing by the direction of the founders. It is true validation of the capabilities of the founders.
They spend very little time with Product and obsess over the 'Story'
Most of their time is spent making slides shows and powerpoint to appeal to investors, and they're obsessed with fabricating the 'story' because that's what sells. This is a huge red flag. The 'story' is supposed to develop organically through the founder's journey by actually working on the product, acquiring customers and getting feedback.
The founders are supposed to be the protagonist in the story, and the story will write itself. They shouldn't be the one writing the story or architecting how the 'story' will sound to others to get 'investment'. This isn't Hollywood or Bollywood.
If founders focus on product and acquiring customers, they don't need to 'prepare' for a presentations all the time. They'll live and breath the journey. The words they use to describe their journey itself will be charming and authentic, because it's what really happened. That in an of itself is the 'story' people are looking for. Start-up stories don't get made on powerpoint presentations, they get made by living the journey, through executing on product ideas, acquiring customers and getting feedback.
Profitability is like Gravity
Whether you believe in it or not, it's going to effect how you run your business. Let's be clear when you start your company you do not have to be profitable right away on the first day or even the first couple of years. It really depends where you are in your product lifecycle. If you are developing the product and have nothing to sell obviously you can't generate revenue. I will discuss how to solve this problem in another post. Once you have your MVP however you need to be working towards breaking-even and eventually profitability. The sooner you get to profitability the more secure your company's future will be.
The message I'm trying to convey in this post is you should be selling each unit of your product or services for revenue and each customer you on board should get you closer to breaking-even and profitability. How much should you charge? That's another topic for another post, but the general rule is as a part of planning, you'll need to know how much your business costs you to operate on a monthly basis. That will give you an idea of how much you should charge and how many customers you need to on board. Metrics like 'cost per acquisition' will come into play. If you want to learn more about this sign up and you'll be notified when I write about them.
You'll need to work out, roughly how many customers you need to acquire per month to cover your costs, and then develop the product and growth strategy to fit. You should have a clear business plan before you start. This is one of the pre-requisites for starting any company. You'll have to learn to live with real-numbers. You'll need to get to profitability no matter what you do.
If you have no clue where / how to even start with basic planning of these numbers, I recommend working for another company first. You'll learn things you can't find in blog posts and books or even universities for that matter. These lessons learn in working in real companies will stay with you and immensely support you into a journey to building a profitable company.