Yes, You Should Care About Reaching Profitability

This article is part of DBA, a new series on Mashable that features insights from leaders in entrepreneurship, venture capital and management.

Among tech startups today, there’s a general belief that they’ll never actually have to achieve profitability. But not every company can count on getting bought by Facebook for a cool $19 billion.

And, of course, those companies who don’t get bought by Amazon, Google or Facebook will have to fend for themselves. The best way to do this? Become profitable.

When do you need to become profitable?

Before you draw up a roadmap to profitability, it’s important to consider what type of business you are trying to build. Is it a smaller lifestyle company that you want to sustain for the long-term? Or is it a high-growth startup where you can afford burn through some cash building your product and customer base?

If you’re a venture-backed technology startup, then it’s all about how quickly you can grow, add customers and become profitable. Don’t be fooled into thinking that you don’t need to be profitable just because other tech startups have been bought or gone public without reaching profitability. Getting in the black gives your company the best odds of survival — or a successful exit. Period.

One thing experienced startup CEOs will always tell you is that it almost always takes longer to become profitable than what you originally predicted. In my experience, doubling or tripling the time you think it will take you to be profitable is a good rule of thumb. And you’ll need to ask yourself what will happen if it takes far longer to be profitable than you originally thought.

Get your product into the market

The first important step toward profitability is to get your product (or service) in the hands of real users. To do this, employ the Minimum Viable Product (MVP) outlook, which means building the bare minimum and getting the product into the market as quickly as possible. You can and should continue to enhance the product over time, but you’ll struggle to keep the company alive if you don’t get customers early.

For my company, as we were building our payment solutions product, we built in the minimum “table stakes” — in our case, credit, debit and some mobile payment acceptance — then went to market. Over time, we’ve added many more features for our customers, but getting to market fast has been key to our success.

I’ve seen many companies who think they are in a really good place with their product because it has more features and functionality than the competition. But then they fail because the competition gets their product out faster and wins over the market. And I’ve seen many others take so long to develop a product that they run out of money before they even get a chance to sell it. Don’t make those mistakes.

Invest in human capital

When I first co-founded my company over 15 years ago, I tried to do just about everything myself. I wrote on our website that we were open 24/7 and slept with a cordless phone to catch every possible sales lead. But I had way too much on my plate as the CEO to follow up in a methodical way, and we probably only closed half of that business. Instead of sleeping with your phone, bring on people who are process-focused and experienced in the right areas.

Another mistake many young startup founders make is hiring lots of bright, young talent — people who look and think like them. Yes, it’s important to build a culture true to your vision, but I learned early on how valuable been-there-done-that experience is, in areas ranging from sales to finance to operations.

If you’re a talented developer, you may want to focus on hiring a good COO. If you’re a visionary without much of a technical background, then finding a great CTO should be top of mind. Building the right team matters more than many new CEOs realize when it comes to growing your company and achieving profitability.

Make tough decisions

Of course, making a profit isn’t the end of the journey. Many companies reach a point where they could be profitable but choose instead to reinvest that money instead of taking more outside capital. This can be a smart strategy if executed properly.

As your startup grows, you will often be faced with some very tough decisions around how to use your capital. At the end of the day, I think the most important thing to remember is that you can always pull costs back out of the business, but you can’t go back and get those customers you never sold to in the first place. Focus on getting your product in front of real users.

Lessons learned

I remember vividly the day our accountant came over with the P&L sheet for our regular meeting. Back then, the “L” side of that ledger was usually a lot bigger. This time, he looked at me and said, “You’re making money!” We achieved consistent profitability pretty soon after that, as we continued to sign customers and revenues went up.

My team still has to make tough decisions all the time (believe me, you’ll never run out of them.) We have to decide where to invest and where to cut costs, but we have the ability to make those decisions thoughtfully because we brought in the customers and partners we needed to build a successful, sustainable business.

Ultimately, if you want to have options when it comes to growing your business, you need to have a viable business model, real customers and revenue. From there you can decide whether you want to hold the company privately, go public, seek a buy-out or even become a shareholder-owned business. But being profitable is the key to having any of these choices in the first place.

Source: http://mashable.com/2014/06/04/business-profitability-tips/