There Is This Crazy Thing Called Profitability

Originally published in 2017.

Are you a founder looking for funding? After a financing round is before a financing round, I know this saying. And even if you have just started your business you probably already think about how to get the financing needed to meet your plans. So, you certainly look for investors that might be willing to invest in your company, or to be more precise, to invest in you as the founders and management team. Because we investors actually invest in YOU.

And yes, you are fortunate. You have founded your company at the right time. Money is out there to be invested. We see hundreds of millions flowing into postmates, deliveroo, foodora, snapchat and the like. Company valuations go through the roof. Another unicorn with a valuation of one billion dollars… and another one…. you may think from time to time.

But is this really sustainable and will this go on forever? Or will we see another bubble bursting? Well, we will see (deliberate ambiguity for those who read carefully).

So, congratulations for those of you who could convince investors to invest in you without having a business plan showing profitability at the horizon.

But this short article is actually meant to help young entrepreneurs and startups that establish or revise their business plans. Certainly, you can create a plan reflecting a freemium business model where you scale your business fast, where you call it a land grab case and where you tell your potential investors that you will monetize after years of scaling and burning cash. I personally like something like “I know, customers do not pay for our products and services yet but believe me they will eventually do.” or “It is a really good product, customers must pay for it.” Or you may try to convince investors with “Now it is the time to use our first mover advantage (as a side note, if there actually is something like a first mover advantage) and rapidly scale. We will become profitable later on.”

I certainly know that there are indeed companies out there that have successfully implemented these strategies (Amazon is a perfect example of a business without years of profitability) and that have received funding on the basis of business plans not showing profitability for a long long long time. In his book "Blitzscaling", Reid Hoffman nicely explains why and when disregarding profitability in the short run makes sense. But please bear in mind that building a business (at least eventually) is also about earning money. 

So, if you are about to create or revise your business plan in order to raise money from investors, please demonstrate a plausible way towards mid-term profitability that comes with an amount of funding that makes an investment attractive for an investor. And please be so kind to avoid scaling your business without having first achieved product-market-fit (unless - as Reid Hoffman describes it in detail in his book- there are good reasons for scaling anyway). 

First you understand your customer (BE CUSTOMER-CENTRIC) and find a go-to-market strategy that allows you to scale your business on compelling unit economics. If you can also offer your customers a great return on investment and a stellar user experience scaling the business makes sense. Only THEN you should fuel your growth engine and enter a high growth phase.

Or in other words: First, you crawl and test your MVP/product or service in a lean startup manner by repeatedly going through the build-measure-learn feedback loop. Then, you walk and establish processes that ensure that you can run and scale the business. If this has been accomplished, you run and scale your business profitably. 

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Comments: 1
  • #1

    Tom Larder (Saturday, 23 May 2020 21:44)

    "Crazy thing" equals "necessary thing". Or what's the point?