A startup should aim for profit, or at least break-even, as early as it can instead of relying on investor cash to fund growth. The author closed Publisha, later ViewsHound, after its main investor could no longer continue, and describes what the team would do differently.
We closed our startup, Publisha (which later became ViewsHound), and one of the most important lessons I want to share with you concerns when your startup should focus on profit, rather than growth.
We ran our company based on the fact that we would receive a certain amount of money every month from our major investor. As such, we concentrated on building our technology and growing our user base quickly. The strategy of the company was to consciously choose not to focus on profit or on breaking even in the short term, but going for growth instead. So how did that work out?
Well, the plan worked to start with, and we did indeed build our technology and grew our user base. We built a sizable following on Facebook within a few months of launching ViewsHound. Then, for personal reasons that couldn’t have been foreseen, our investor wasn’t able to continue his investment. We had a company and some traction, but no cash coming in. As I learned on my MBA, and wish I’d remembered here, “Cash is King.” Without cashflow, you’re sunk. And we sank.
We could have tried to raise investment, but we didn’t think that we’d get a great valuation for the company, and would probably have to give away a large part of our equity. Since some of the co-founders had a minority stake in the first place, it just wasn’t appealing, so we decided to close the company.
So maybe we were just unlucky? In one sense we were, but things go wrong, and if things go wrong anywhere, it happens in a startup when you’re working with extreme uncertainty. We underestimated the risk of not receiving our investment cash—a risk that turned out to be a reality.
Looking back, what we should have done is try to get to profit, or at least break-even, more quickly. Then if the investment cash dried up it wouldn’t have been lights-out time. We should have built multiple revenue streams more quickly, and relied on our customers to pay our bills, not our investors.
Personally, I’m with Jason Fried of 37signals on this one. A business should make money from the start. Otherwise it’s not actually a business. We should have charged more money for more things. Customers loved what we were doing, and they could and would have paid more than they did. In fact, when we announced we were closing, one business user, who we weren’t charging any money at all, paid us $150 a month to keep the server up for a while longer.
If we had been making money, we would also most likely have received a higher valuation for the company if we chose to get further investment. Alternatively, we might not have even needed further investment, and could have kept more of the equity in the company for ourselves.
So that’s my big lesson from having to close our company down: break even as quickly as you can, aim for profit as soon as you can, and if the going gets tough, at least you can keep going.
What do others say?
The US Small Business Administration (SBA) publishes survival data showing that a large share of new businesses close within their first few years. We should however mention that those numbers cover all small businesses and not just tech startups.
Mark Suster, a two-time entrepreneur turned VC, wrote in 2011 that the focus should be on profit and put it like this: “Most companies (98+%) in the world (even tech startups) should be very profit focused. Being profitable allows you degrees of freedom you don’t have when you rely upon other people’s money.” It simply provides you with more opportunities and makes the startup sustainable much faster.
VC Fred Wilson also wrote on the subject in 2011 and appears to agree with this, or at least on the fact the businesses should aim to break even if they are not making money, rather than running at a loss while growing.
Martin Zwilling recommends that you “focus on profit all the time, every time. Of course, growth is implied in every focus, and profit enables growth.”
So, in conclusion, for most businesses, most of the time, it would appear that focusing on profit is a useful thing to do. Just like Henry Ford could have told you a century ago. Maybe things don’t change that much after all.
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Frequently asked questions
Why did Publisha shut down?
Its major investor could no longer continue funding it for personal reasons, so the company had traction but no cash coming in. The founders didn't expect a good valuation from new investors and would have given up a large share of equity, so they closed it.
What should the founders have done differently?
Reached profit or break-even more quickly, built multiple revenue streams sooner, and relied on customers to pay the bills. The author also says they should have charged more for more things.
What share of new businesses survive?
US Small Business Administration data shows that a large share of new businesses close within their first few years. The post notes these figures cover all small businesses, not only tech startups.
Do investors recommend focusing on profit?
The post quotes Mark Suster saying most companies (98+%) should be very profit focused, and Martin Zwilling recommending a focus on profit all the time. It says Fred Wilson appears to agree that businesses should aim to break even rather than run at a loss while growing.
