The March To Profitability


What makes a startup successful?

Getting to profitability and keeping it there.

At least that is my opinion. But why is it so important to get to profitability?

It gives you choices.

Basically, you can decide what to do and how to do it without having to worry about survivability. And if you have a Board of Directors, it lends credibility to your “choices” along the way, allowing more independence in how the company is lead. And if you are in the process of selling the company, then you are in control of the price and not the buyers (it is not a bail out M&A).

Many start-up companies do not worry about being profitable in their nascent stages, especially during times of economic abundance. They disguise the lack of concern for being in the black as “the time that we should invest in the future”, the “time for growth”. Actually, it is hard to disagree with that. Yes, you want to “grow” the company and you want to “invest” in the future but there should be a balance.  When a company is started, there is no revenue and none can be expected. The revenue needs to be grown. Indeed, in its first 12 months a company will not, most likely, be profitable or even have revenues, however, the drive should be there. The tendency should be created and in place from day one; in this way, the culture of the company will drive profitability and, in a way, make it more achievable.

Let’s not confuse revenue with profitability. Because revenues may be collected, it does not necessarily mean that you are driving to profitability. It is the first stage to it, and it does slow your burn rate giving you more time, but, in this deceptive thinking, you miss the point all together and you feel a renewed need to expand. This will drive your burn rate back up, offsetting even worse your revenues and making profitability that much more unattainable. Then, in order to sustain the company and its growth, new funding is sought, further diluting everybody that invested in the company. It makes the effort unworthy and a waste.

In one of my first blogs entries, “Purist, Opportunity and Growth”, I discussed different ways to build technology for a company. My prefered method is “growth”, since, in my opinion, generates the least amount of friction, thus resistance, the least amount of waste and it protects and safeguards the company assets. Yes, indeed, there is investment going on but not wasted. And growth is a result of answering two questions: (1) What does the company needs in the form of a strong foundation, and (2) What do the Marketing and Business Development groups need in order to make the company’s product strong in the targeted market. All else is a result of answering these two questions.

The last two questions, however basic to building a company, do not completely  answer the question of “time to market”. That answer is found in fast execution. But fast execution can not be done on the backs of your employees and by forced marching them. It can not be done by setting wrong expectation for your clients and partners. It can not be done by promising some date that is 100% driven by a sales need fiction. It is understood that in order to build a company to success we all have to work hard and there will be long days; even long weeks. It goes with the territory. But that effort can not be wasted by continuous desperate moves.

Fast execution is achieved by carefully reducing the scope of the projects to its basic elements and focusing on them. Then, by using and exercising these elements, you will discover what the next steps are. What you were lacking in your original planning, what elements need to be added, what needs to be changed. With these elements (additions and changes included) in place the business begins to develop and will further your vision and your understanding of what is needed next. At the end, the sooner you plant a flag and claim a territory, the sooner it will be yours.

This is what my “new” boss calls “smart speed”. I, on the other hand, call it “lack of desperation” and “focused execution”. Smart speed should not end after the initial product introduction. It should continue since it maximizes productivity and minimizes cost (not just in terms of funding). I normally equate this to baby steps and one step at a time. Before you know it, you are running and not much is left behind and progress is made at giants’ speed.

Once you get going on a project, a great many deal of ideas begin to surface and  are brought forward. Not all of these ideas are good, not all of them bad. They are just ideas. In some cases, these ideas become distractions. In other words, some ideas are brilliant, or deceptively brilliant, that derail the focus from “fast execution”. It is only natural, people have a hard time staying focused. It does not mean, however, that you do not think of new ideas and those ideas not shared. Ideas need to be managed so they can be maximized. And you maximize them  by sharing them with a small group of people with the understanding that they are “just” ideas that need to be challenged in the context of fast execution.

How long after starting should a company be profitable? As soon as it can. As stated above, a company is not successful unless it stays profitable. Staying profitable can take years and that is OK. Not ideal, but OK. What I mean by this is that as long as there is a balance and there is growth a company is not wasting resources, which is 50% of the battle. The other 50% is being self sufficient, to the extent that the company can chug along without further external investments. Once this is achieved, then an external investment is strategic and can be use to expand and extend the reach of the company. As such point the company is in a position to break through the rut and become a success.

The March To Profitability is hard, and if “smart” then is not forced and leads to success.

2 Comments

Filed under Business, Thoughts

2 responses to “The March To Profitability

  1. I find that balancing the questions of “What will get the company to the $ first?” with “What strategy will allow the business to have a sustainable and profitable future?” are vital to the success of any start-up.

  2. I agree; but you also need to consider that when you start a company you have an idea, a sort of a target market, and a VERY loose strategy. And I stress the loose part. In my opinion, the strategy will develop as the group starts executing, and the company meets its market and you start to see what tracks are left where the rubber meets the road.

    You do not know what you do not know. Job one is: build the first beta or v1 as fast as you can without violating best practices. Job two: choose a marketing direction and test it. See how it fares and react strategically to the results. Goto job one but v2. So on and so forth. Very soon you have a strategy that is aligned with your company’s products and its market and an execution plan.

    I am not saying: Go blindly into it. Have a plan and a strategy; but do not be married to either. I promise you, they will change as soon as you meet your market.

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