Get to Profitability as Fast as Possible

Once you raise money a clock starts. When the clock runs out of time you have no money left and need to shutdown the business. The clock can be extended by increasing revenue, decreasing expenses, or by raising additional financing. It's in the best interest of the company if you get the company to profitability quickly. Once your profitable, the clock reverses and begins to run the other way.

There has been a shift recently with how startup companies are ran. The old school way of thinking was to build a sustainable business. A sustainable business grows organically. If a business runs out of money then it stops operating. Venture capitalists came into the picture to to bridge the company until profitability. Early venture capitalists wanted sustainable businesses because it meant better exits.

During the early 90's, the first tech bubble came along, and changed the sustainable way of thinking. Companies were building companies on a dream without a way to get there. The market corrected the change in thinking and access to capital dried up.

The sustainable model is being challenged again. The ecosystem as a whole doesn't care about reaching profitability. Companies like Instagram weren't concerned about profitability, but they had a small team and a lot of users. The argument is that users are valuable and you will eventually figure out a way of making money.

Stop putting it off. Get to profitability as quickly as possible. The business should be able to survive on it's own without any additional capital. This gives the business and you more time to test strategies.

Build All The Things

When Neil Patel and Hiten Shah attempted to get outside investment for Crazy Egg they were unsuccessful.

After pitching Crazy Egg to venture capitalists for 6 months, I realized no one was going to invest in it. Because of this we had no choice other than to figure out how to make Crazy Egg profitable.

They succeeded and reached profitability with Crazy Egg. As Entrepreneurs, they built something larger than themselves. They built a sustainable company and decided to startup another company. One they could get venture capital funding with. This became Kissmetrics. But, they didn't shut Crazy Egg down. They let it continue to run as a profitable business.

Raise Money On Your Terms

Once your business starts making money you have time to seek out the investors you want. There is no rush. The profitability from Crazy Egg gave Neil and Hiten the ability to raise money on their terms. Since they already had a profitable business they weren't rushed to get financing.

Atlassian raised money after bootstrapping to profitability. Atlassian emailed venture capitalists with an outline of the terms they wanted. Many of the venture capitalists responded to them, however, Accel was the only one that read the email and responded the way Atalassian wanted.

Note: I heard the Atlassian email story on a podcast, but I can't remember where I heard this. If you know which podcast it was, please let me know.

Companies Are Supposed To Generate Profit

When you are building a startup you are juggling a ton of things. You may be focused on user acquisition, financing, product development, customer support, hiring, blogging, customer development, marketing or sales. It is easy to forget the purpose of a company. The purpose of any company is to generate revenue. More importantly, a company is supposed to generate profit. The cash you receive is called capital, not money, because you are supposed to create money from the capital.

Jeff Bezos setup expectations to investors that although they won't be profitable initially, they would be eventually.

Amazon's initial business plan was unusual. The company did not expect a profit for four to five years. Its "slow" growth provoked stockholder complaints that the company was not reaching profitability fast enough.

Amazon was still generating revenue and attempting everything to get to profitability.

Stop wasting time and resources, get to profitability as fast as possible.

Written: November 29, 2012

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