The path to profit should never include a mystery step
If your company isn’t profitable yet, you’re probably hearing the clock ticking a little louder these days.
You’re not alone. My inbox is filling up with panicked founders trying to figure out how to get profitable immediately – yesterday, if possible.
Here’s how the wake-up call came for one of them:
An entrepreneur with a killer idea had done all the homework – the business model was polished, the financial projections were airtight. They had a little traction. They’d been networking, and had already made a few solid investor connections. They were finally ready to go out there and start an honest-to-goodness, future-is-bright fund raise.
Then the ground shifted beneath their feet. Economic instability reared its ugly head, and the venture capital community they’d been networking with, in unison, started talking about how they’d been requiring revenue and profitability all along. Try again later, they said, once some revenue was coming in.
Welcome to the party, pal. It’s a startup killer Catch-22. You need to show profitability to raise money, but you need to raise money to build and sell the thing to make the profit to show the investors.
This is not the first time this paradox has suddenly dropped into founders’ laps. In fact, it’s a cycle that happens over and over again. Sometimes macro economic conditions collapse, other times a specific industry or technology flames out, but more often it’s at a granular level, maybe when some of those airtight financial assumptions don’t pan out.
Regardless of the catalyst, at some point, your company is going to have to be profitable. So why not be profitable right out of the starting gate?
Three Steps To Early Profitability
You know that old meme: Step 1 is a great idea, Step 2 is a question mark, and Step 3 is profit? This is the opposite of that.
Over my 20-year career in startups, I’ve always preached revenue first, profit second, growth third. This approach tends to keep you off certain investors’ radar, but I’ve also raised money and been a part of startups that have raised a lot of money. I can assure you that those investor pitches are much more productive when you’re already profitable.
This is the approach I’ve been using in one form or another for over 20 years, and the strategy has evolved as technology has evolved. It’s not a magic script, and I can’t tell you exactly how to get to profitability with your own startup, but I can give you guidelines and add a few rabbit holes you can slide down.
Step 1: Start Selling Your Product Before It’s Built
If you’ve already started creating an investor pitch, you’re already selling your product before it’s built. An investor pitch is simply the proposition of selling investors massive projections of sales before the product is built – or the team or the company.
So let’s reduce that massive forecast by a few notches and start selling the dream one unit of product at a time.
Ditch your pitch deck, and create a sales deck instead. The simple truth is you’re never going to sell a forecast of millions of units to an investor if you can’t prove out selling one unit to one customer.
But let’s be real. A slick sales deck isn’t going to sell a product that doesn’t exist. Thankfully, the concept of Minimum Viable Product has allowed all kinds of companies to sell all kinds of products while those products are actually still being built and refined.
With a much smaller investment, say one that comes directly out of the founder’s pocket, you can start building the dream. There are a number of pre-MVP steps you can take, from diagrams to demos to mockups to get your product one step closer to reality. Putting something tangible in front of a customer is a great way to start getting them to think about helping you finance the path to the actual build.
Once you’ve got a visualization of your product, you can even go so far as to build the product using an MVP strategy and even using no-code and low-code platforms to get started. It won’t be perfect. It might not even be investable, but it will help you start answering investor questions about market viability, revenue streams, and profit potential.
Step 2: Stop Focusing on Anything That Isn’t a Sale
Startups tend to take a lot of time in the beginning to measure their progress with a lot of metrics that aren’t dollars. This is fine, as long as you don’t use those positive results to justify resting on your laurels and delaying the pursuit of revenue.
The best way to get to revenue is to ignore everything that doesn’t generate revenue. Here are some ways to get a revenue-first strategy started.
And when startup founders come to me with problems achieving sales traction, it usually boils down to a broken or anemic sales process. Regardless of who is selling your product or how it’s being sold, spend time developing a coherent sales strategy before you start selling.
Step 3: Eliminate Costs As You Scale
Every startup wants to scale, and a lot of them do start scaling, but then they realize that as their top line is growing, their bottom line is shrinking. This is the opposite of profitability, and this is where most investors point to when they demand a pivot to profitability.
When you chase scale, make sure you’re not just planning to expand your market, but at the same time also reducing your burn rate.
And finally, you can’t just pull cost-reducing measures out of the air, or else you’ll end up cutting corners and delivering an inferior product. If you use a crawl/walk/run strategy, it will become clear what you should automate and how much time and money it will cost to automate.
All together, these steps give you something to sell, a way to sell it, and a plan for profitability. I left a lot of paths you can wander down to hopefully apply each of these concepts to your own startup’s context.