Make Your Startup Profitable From the Start: A Practical Guide
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Chapter 1: Understanding the Profitability Challenge
If your business hasn't turned a profit yet, you might be feeling the pressure more than ever. You're not the only one; many founders are reaching out for urgent advice on how to become profitable immediately—if not sooner.
Here's a glimpse into the reality faced by one entrepreneur: A Promising Fundraise Turns Into a Dilemma
A tech entrepreneur with a brilliant concept had done all the necessary groundwork—crafting a solid business model and robust financial projections. With some initial traction and promising investor connections, they felt prepared to embark on a fundraising journey.
Then came an unexpected shift. Economic uncertainty began to loom, and the venture capitalists they had been courting suddenly insisted on proof of revenue and profitability. They were told to come back later, once there was some income to show.
This presents a classic startup paradox: you need to demonstrate profitability to secure funding, but you require funding to develop and market your product to achieve profitability in the first place.
This cyclical conundrum is a recurring issue in the startup world. It can be triggered by broader economic downturns, specific industry challenges, or simply when certain financial assumptions don't materialize.
No matter the cause, every startup will eventually need to become profitable. So, why not aim for profitability right from the outset?
Three Steps to Achieve Early Profitability
You may be familiar with the adage: Step 1 is to have a great idea, Step 2 is a question mark, and Step 3 is profit. This guide flips that notion on its head.
Throughout my two-decade career in startups, I have consistently advocated for a strategy that prioritizes revenue first, profit second, and growth third. While this approach may not appeal to some investors, I have successfully raised funds and been involved in startups that attracted substantial capital. I've found that pitches are significantly more effective when profitability is already established.
Here’s the approach I've honed over the years, adapting it as technology has progressed. While I can't provide a one-size-fits-all solution for reaching profitability, I can offer some guidelines and insights into potential avenues for exploration.
Step 1: Begin Selling Before Your Product is Complete
If you're in the process of crafting an investor pitch, you're already on the path to selling your product prior to its launch. An investor pitch essentially forecasts massive sales projections even before the product is ready.
Let’s temper those forecasts and focus on selling the grand vision one unit at a time. Instead of a pitch deck, develop a sales deck. The reality is, if you can't sell one unit to a customer, projecting millions won’t help in securing investment.
However, having a polished sales deck alone won't suffice if your product doesn't exist yet. Fortunately, the Minimum Viable Product (MVP) concept has enabled numerous companies to start selling while still developing their offerings.
With a relatively modest investment—potentially from the founder's own funds—you can take preliminary steps to bring your vision to life, from sketches to prototypes. Presenting something tangible to potential customers or investors can spark interest in financing the full development.
Once you have a prototype, consider employing an MVP strategy and utilizing no-code or low-code platforms to initiate development. It may not be perfect or investment-ready, but it will help answer investor inquiries about market feasibility, revenue potential, and profitability.
Step 2: Prioritize Revenue Over Everything Else
In the early stages, startups often track various metrics that do not directly translate into revenue. This approach is acceptable as long as it doesn't lead to complacency or delay in pursuing sales.
The most effective path to revenue is to concentrate solely on activities that generate it. When founders approach me about challenges in achieving sales traction, the root cause often lies in an ineffective sales strategy. Regardless of who is selling or how the product is being marketed, it's crucial to develop a cohesive sales plan before diving into sales efforts.
Step 3: Cut Costs While Scaling
Every startup aspires to scale, and many do start to expand, only to find that while their top line grows, their bottom line shrinks. This situation contradicts the goal of profitability and is often where investors urge a pivot toward profitability, leading to layoffs and budget cuts.
When pursuing scale, ensure you are not only focusing on market expansion but also actively working to lower your burn rate.
It's important not to implement cost-cutting measures arbitrarily, as this could compromise product quality. By following a crawl/walk/run framework, you'll clearly identify areas for automation and understand the time and resources needed for such initiatives.
Together, these steps create a foundation for what to sell, how to sell it, and a roadmap to profitability. I've provided several paths for you to explore, and I hope you can adapt these strategies to fit your startup's unique context to achieve profitability sooner rather than later.
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A version of this article first appeared in Inc. Magazine, where I contribute a weekly column focused on startup and innovation advice.