Stream of Consciousness

MRR, ARR, churn, etc. You need to know your numbers. When times aren’t as tight, you might see more emphasis on revenue vs. profitability as startups scale. But, in 2022 and the near term, profitability is vital for startups hoping to lure investment dollars.

Hockey stick revenue growth is the goal for every startup. One of the best studies you’ll find on companies that have achieved it is from Bobby Martin. Martin looked at 172 startups in his study (you can download it here), and it is packed with amazing insights. What won’t show you is how profitable those 172 companies were.

In 2019, Inc. published “What Is More Important: Growth or Profitability? The Answer Is Changing Fast.” Early in the piece, it highlighted that your end goal as a founder should dictate if you emphasize growth or profitability…

• If going public or exiting via a significant acquisition is your goal, focus on growth
• If you’re focused on building a sustainable company, focus on profit

And let’s not forget Sequoia’s 52-slide deck, Adapting to Endure (you can find a good summary here). Related to profitability, they said…

• “Growth at all costs is no longer being rewarded.”
• Investor focus is shifting to startups “who can demonstrate current profitability.”
• “Durable growth with improving profitability is always the path.”

VCs will still be eyeing their 10x-20x returns. They’re not going to get there if the startups they invest in do not scale quickly (Jeff Bussgang’s 2016 blog post “Growth vs. Profitability and Venture Returns“), so you cannot abandon emphasizing growth, especially not if you are seeking funding. You do, however, need to measure your profitability.

Investopedia recently posted “The Best Way to Calculate Profitability for Startups.” They recommend that you measure your profitability in three ways…

• Marginal revenue
• Gross profit
• Operating profit

Of course, we’ll always recommend you know your net income. After all, how else would you be able to calculate EPS?

But what if you’re at the seed stage? After all, it can take the average startup 3-4 years to reach profitability. You need to have a rock-solid plan on how you will spend their investment, what it will take to get the product to market, your sales model, if you have a “big fish” potential client on the hook, etc. The point is that you need to lay out your plan on how you’ll generate revenue and how you’ll run the business so that future investments will be made to scale the company.

It’s a great time to be a business-minded founder.

BONUS READ:  Check out First Round Review’s “The Do’s and Don’ts of Rapid Scaling for Startups.” It’s a fantastic read for all leaders.