Profit 101: Intro
May 8, 2023
Startup Growth and Profit
Startups and the startup community have always been about growth.
(So much so that YCombinator founder Paul Graham wrote a blog post that literally equated the two!)
I agree with that premise in part - but part of it always bothered me. Silicon Valley's obsession with growth at all costs came to obscure the actual purpose of companies: to earn a profit. If the purpose of a for-profit corporation is, well, to earn a profit, then why wait years to figure out if it's possible? Why is the startup community so obsessed with one dimension that it ceased to respect the fundamental definition of the corporation?
We may quibble with Milton Friedman's words, that "The Social Responsibility of Business is To Increase Its Profits," but the essence is true: a corporation exists principally to generate profit for its shareholders.
The focus on growth without profit reached a fever pitch in the ZIRP era, when 0% interest rates lowered the cost of money and enabled startups to access fountains of capital. That era is gone for now, and while it may eventually return, the current startup funding environment brings clarity to founders - maybe cash flow matters?
My goal with the Profit 101 series is to explore how to build startups for profitability from the start. I've taken this approach with all of my startups, and I find it to be a more sustainable approach which doesn't sacrifice extraordinary founder outcomes. While I've never raised a dime, and am a boot-strapper by practice and mentality, the series won't be solely about bootstrapping. Whether or not you raise capital, there's a lot you can do to focus on running efficiently from day one.
Capital efficiency is now in vogue in startup land - but I seek to take it a step further. Let's discuss how to get to a zero burn rate, and how to get to industry-leading profit margins from there.
However, I should answer one question: why read my take, the take of a random boot-strapper out of Atlanta? I'll offer you this:
With my last startup HiddenLevers, we achieved a 53% EBITDA profit margin while growing at a rate of over 60% per year for 9 years straight.
HiddenLevers was a SaaS startup, a space in which most startups and even most public companies bleed red ink for years! And yet, there's a quiet band of SaaS companies built another way - think 37Signals (Basecamp + Hey), think MailChimp. My new startup Fraction is taking a key concept that drove our profitability at HiddenLevers and offering that to all startups. We achieved breakeven in 8 months, and I plan to get to industry-leading profitability with this venture as well.
Tldr; How do you build a startup from day 1 with a focus on profitability?
Don't quit your day job until you've made some real progress on your startup.
Define your MVR - Minimum Viable Revenue, and a timeframe to achieve it. Shut down if you don't get there.
Hire every employee fractionally at first and upgrade them if they are a perfect fit when you have the money.
Don't be afraid to charge more for your product - price and sales quantity are both levers, and you must use both.
Insource like a beast - and it's never been easier with ChatGPT et al.
I plan to go in-depth on all of this and more in the coming weeks, with one goal in mind: spreading the word on how to build profitably.
More Posts from the Profit 101 Series
Startup Costs Video Series
Pursuit of Profits