
Suster: Should Startups Focus on Profitability or Not? - daviday
http://www.bothsidesofthetable.com/2011/12/27/should-startups-focus-on-profitability-or-not/?awesm=bothsid.es_GkX&utm_campaign=&utm_medium=bothsid.es-twitter&utm_source=t.co&utm_content=awesm-publisher
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orthecreedence
I don't think it makes sense to even think about starting a company if you
don't have some sort of idea of how you're going to make money. This whole
idea of build it first and figure out the money stuff later may work for a few
companies, but it's more or less a recipe for disaster. Investor capital is
temporary, although many treat it as an endless source of income.

~~~
brador
It was a great concept 5-10 years ago when ads made a decent amount of money
and people didn't spend 80% of their time on Facebook/Google/whatever.

In the present day, we have large dominant sites, so you need a better way to
make money than "I'll get the eyeballs and point them to ads eventually". The
eyeballs aren't coming in sufficient quantity to make ads profitable anymore.

Either sell them something, affiliate or go mobile.

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igorgue
Are there any success stories of companies that turned on the "profit switch"
and started to make money?

I'm just very skeptical about this. It looks like many companies are looking
for the big acquisition and there's no plan "B".

Also this article makes the assumption that companies today are actually
making some revenue, but, most of them (at least the ones that get press) are
not!

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alain94040
Google and Facebook for a start.

If you build something people want and use, _in the scale_ of national TV
audience, then you will be able to monetize.

If you have a great product for a niche, then double-check your unit economics
before you start.

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jonnathanson
It needs to be said that Google and Facebook are perfect, no-brainer
advertising platforms. Mass audiences + natural use behaviors that can be
monetized via ads + user analytics and segmentation capabilities = beaucoup
advertiser bucks.

But it's a mistake to look at a typical startup and assume there's some sort
of magical "monetization switch" that can be flipped when sufficient scale is
achieved. If your platform isn't a natural fit for advertising, or for other
forms of monetization, then monetizing is anything but easy.

Scale isn't sufficient. It's necessary in a lot of cases, but in and of
itself, it doesn't guarantee anything.

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zackattack
I'm having a hard time coming up with a case where a platform /product
achieved scale (in the age of modern advertising), yet couldn't monetize.
Which ones can you think of?

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webwright
Foxmarks/Xmarks and Delicious come to mind.

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j45
How does a startup ever become a business if it doesn't make money, at least
to cover itself?

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jon_dahl
Eventually, every business wants to make profits. That's kind of the point of
Business. The question is when. If you're a startup, you can:

A) Aim at near-term profitability (say, 12 month horizon) by keeping expenses
low and focusing on revenue growth

or

B) Aim at long-term profitability (say, 5-10 year horizon) by raising a lot of
money, spending it on sales and marketing, R&D, product, etc.

Each has advantages and disadvantages. My take-away from the article: if a
competitor could beat you by raising $30M and focusing on growth at the
expense of profitability, B) might be the right option. Otherwise, A) should
be the default for most businesses.

~~~
j45
In your perception, what percentage of long-term profitability startups end up
achieving it?

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jon_dahl
Tiny, but the payoff is often bigger. :)

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ThomPete
Clayton Christensen in his great book The Innovators Solution talks about
being "patient for growth not for profit" which I think is a great way to look
at it.

I recently asked him on twitter this advice would fit into the likes of
FaceBook and others and got a reply back that they where looking into that.

It seems to me that the answer as always is it depends.

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codelust
Of course, they should. It is not whether a company should be profitable or
not that is the important question, it is when it should be profitable that is
more important.

Depending on a variety of factors, companies have runways of differing
lengths. Ideally, you should attain profitability as early as possible. In the
real world it is not that simple a construct.

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ivankirigin
With subscription SASS services, growth means getting closer to profitability.
Maybe that is why i like them so much lately. It is nice when things overlap.
If I were in the consumer space where you grow before trying to monetize, I'd
feel really nervous about whether that something that will drive profitability
even exists.

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kennystone
He answers "yes" for 98% of companies, which seems to be a reasonable guess,
if not too low of a percentage.

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pbreit
But don't forget that almost all of the startups are in the 2%.

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kennystone
Nah, just the startups looking to become absolutely huge (most shouldn't).

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jeffreymcmanus
Profit vs. growth is a false dichotomy.

Of course a growth investor is going to insist that "98% of startups should be
growth focused". In this regard, profit and venture investment are two
different (and, essentially, competing) sources of capital with their own
upsides and downsides.

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rokhayakebe
Profitability should not necessarily mean that you are earning more than you
are spending, but that you have found a scalable way to make $1 while spending
less. Once you have achieve this, you can focus on everything else.

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nirvana
This is a great article and it reinforces for me, the importance of the
concept of "ramen profitable". If you're Ramen profitable, you're putting
essentially all of the profits you could be making into growing the business.
You're not running at a loss, and thus not in the situation where a lack of
ability to raise funds would kill your runway. But you're also in the
situation where, if some invested were interested in plugging $10M into the
company you should already have the mechanisms to manage that money and
financial prudence to give the investor a high expectation that you'll put
that money into growth.

Its really easy to spend other people's money and have no profits, and also
have that show up as high growth. You can turn VC dollars into revenue thru a
variety of ways that are unsound for the business in the long term. A trivial
example is taking the VC money and then buying your own products on the open
market. This would likely be considered fraud, but there's a variety of
"partnerships" and inefficient advertising methods whereby you can do the same
thing. If you just want to show growth.

But if you're ramen profitable, and have traction, you've shown the business
is viable on its own terms. This is akin to finding product market-fit. They
might not happen at the same time, but being ramen profitable is a lot easier
once you've found product-market fit.

Of course investors, generally VC types, want to see massive growth and are
not as concerned about profits. But as a founder you have to look out for he
business... and there might not be as much VC interest as you would like, and
in my experience with VCs they are known to drag out deals.

In fact, in several of the deals, during due diligence the VC determined the
amount of cash we had on hand. They also made it known that they wanted us to
start spending more on certain initiatives, and to not worry bout it, we'd
close well before there was a cash crunch. Yet in both times, by the time we
did close, they had us over a barrel because we were about to run out of cash
due to taking their advice.

So, I think ramen profitability is a good balance. You're not wasting gross
margin by banking profits, you're turning it all into, hopefully, an
investment in future growth. You're less dependent on VCs, but have also shown
the discipline to have compelling examples of how you can turn their money
into growth, since you've been doing it with your gross margin so far.

