What Happens When Your Startup Breaks Even?
“Operating breakeven” means that your startup has reached the point where it is generating enough revenue from sales to cover all the variable and fixed costs, including partners’ salaries.
Is it a big milestone? Sure it is, especially for an early-stage startup, because very few ever reach this point. Most of them simply flop, and others manage to get their next round of investments before they become operationally profitable.
But what if it happened to your startup? You’ve worked hard for many months, from an MVP to a production-ready system, you’ve started to sell, and last months you’ve sold more than you spent…
Time for a champagne!!!
… and when you open the bottle, remember:
It’s just the beginning!
In fact, your success, the near future, and perhaps the rest of your life depends more on the decisions you will make now, than on the fact that you’ve just reached the breakeven point.
Where we are?
Let’s take a specific example. Imagine a company:
Time since founded:14 months Number of co-founders:3 people full-time Current monthly run rate:$10,000 Variable costs for last month:$3,000 Fixed costs for last month:$9,000 Monthly growth rate:15% Cash remaining:$3,000
Let’s assume that $9,000 of fixed costs includes basic salary for 3 co-founders, which is just enough to keep breathing, and those co-founders work day and night to make the wheel turning. Pretty standard situation for an early-stage startup.
First of all, you are not there yet. Total monthly cost is $12,000 while you are only earning $10,000 per month. However, $3,000 cash in bank, plus some money you can easily get at this stage in form of a short-term loan or an overdraft, gives enough room to run for another 2–3 months. And with 15% month-to-month growth you will almost certainly hit the point!
That’s why decision making process normally starts before you actually open a bottle of champagne :)
Where are we going from here?
There are two scenarios that can follow this milestone. You either keep going, “freeze” the existing business model and concentrate on growth, or use the current stage as a foundation for the next big leap.
Scenario 1: Safe “Marathon”
You are fed up with craziness! Finally you have something that works, and it’s important to keep it. There is still a lot of work ahead to grow the business, but at least you are guaranteed that it won’t flop.
Is the Marathon a way to go? It depends on who you are, and how your startup was initially funded. If the goal is to have a nice lifestyle business, and you did not go beyond 3 Fs, it might be a good option.
Here are some facts about Marathon:
- No more money needed! When a business is operationally profitable it tends to generate extra cash while it grows.
- The business won’t earn millions (well, maybe just one, after about 10–15 years if you are lucky and keep working hard).
Many people think that lifestyle business is a way to reach “financial independence”, i.e. do little work and earn money. In practice, however, it requires much more work than one would do at an ordinary job.
Scenario 2: Risky “Sprint”
If you have raised any investments, there is very little chance you can choose “Marathon”. No one would be happy to let you use their money for your lifestyle! Investors demand return on their investments, and the numbers that you have at the moment will not satisfy them.
In such case your only option is Sprint.
The idea of “Sprint” is to generate maximum value in the shortest period of time, regardless of how much other resources it takes. It requires you to use the best tools, best people and a lot of cash to continue developing idea, product and market rapidly.
Some facts about Sprint:
- Your current business model is not a final destination. If something works small, it does not work at a scale exactly the same way, and vice versa. It means that you will need to change your business model and scrap a lot of work you’ve done — maybe not just once.
- You need more money! To generate value quickly you need to innovate quickly, which means you need to experiment, and that means current cash flow won’t be enough…
Break even point is a good moment to raise the next round of investments. The idea is still fresh and appealing, its survival is proven, and the team has demonstrated they can succeed. Before pitching to VCs, think what do you need to change in your venture to go from 10,000 monthly run rate to 100,000 and beyond in a very short period of time. It’s going to be a tough exercise!
Good luck with your business!