A Startup CEO’s Perspective on Getting Profitable
Last week three of the smartest VC writers — Feld, Suster and Wilson — traded perspectives on the value of startup profitability. It’s great perspective, of course, but we need more voices from those of us in the trenches. So I’d like to share my perspective on the Ahalogy journey to and benefits of being profitable.
A few months ago we had our bi-weekly, all-hands “Drink ‘n Learn” meeting on a cold Friday afternoon at Ahalogy. It’s our ritual of sharing updates, learnings, wins and losses. Of course there is beer available to make the hour a little happier. I started the meeting by asking people if their ale of choice tasted different — and informed them that this was the first beer that we had paid for out of company profits rather than investors’ pockets. It sure tasted sweeter to me. Thanks to the incredible work by our team we arrived at a long-term goal while becoming re-energized for the journey ahead.
Reading the Writing on the Wall
Nearly two years ago we started to feel the pressure on fund raising. Investors that once seemed to throw money at companies such as ours were beginning to pull back. Valuations on new investments fell significantly. Companies in our space, including some close competitors, went out of business or were purchased for fire-sale prices.
Our business was growing, but not at true take off yet, and our monthly burn was in the hundreds of thousands of dollars. We were starting to see faster growth in some new products, but didn’t have the perfect story and consistent quarters yet. I had recently moved into our CEO role and had a pretty stark choice in front of me: Either get on the road and sell like hell to find a new investor that would buy into our story, or stay in the home office and figure out how to get our business profitable.
The decision ended up coming down to something pretty simple: We realized that we could not control what investors would think of us and whether they would open their wallets, but we could control our spending, rally our team to the challenge and take the path to profitability.
Setting the Life Date
We have always been open and honest with our employees about what was working and what wasn’t, so it was a no-brainer to share our decision to get profitable by controlling costs. But I knew that we would need some kind of rallying cry to turn this into a positive opportunity rather than a frightening crisis.
I thought about one of the somewhat comical things that we tell ourselves in the startup world — that there is a “Death Clock” for every company pointing to a specific date when you run at of money at your current pace of spending. I took this idea and spun it on its head, coming up with the idea of a “Life Date” when we would achieve positive profit and have infinite runway.
This became the focus of my story about our situation and need to get profitable. We put together a forecast that was at least 12 months away from this Life Date, and showed the company the assumptions it would take to get there. We set up a monitor in our office with a live countdown showing days, hours, and minutes to get there.
We made some very hard calls to hit our number. We had to eliminate several positions and said goodbye to people that were incredibly talented and dedicated to our company. It helped that we were completely open about our situation, and we assisted them in landing new positions as quickly as possible.
Those of us that remained redoubled our efforts to grow the new products that had started to show signs of life. With a mix of fear and resolve we fought hard and the efforts began to bear fruit. Our burn rate started closing up and revenue grew faster than before. When we tallied the numbers in January 2017 we eked out our first profit. That month we only netted something around $2,500 — but it was priceless proof that no matter what happened next, we had beat the odds and built a real business.
Adding up the Benefits of Profitability
In the time since hitting our Life Date, we’ve widened our profit margin considerably and even took our annual forecast up after a blazing Q1. The longer we’ve been in the black, the more benefits I’ve seen to this position. Here are some of the pluses:
· Infinite Runway — We don’t have to raise money again if we don’t want to. Endless investor pitch decks are over. I get to spend the vast majority of my time working on building the business we think is best, rather than spinning a never-ending story about how we fit into each investor’s point-of-view.
· Insurance — We’re still a startup business selling new products, so revenue can be somewhat unpredictable. With a growing surplus in the bank we have peace of mind knowing that we’ll be alright if the quarterly numbers don’t come in exactly as expected.
· Higher Valuation — It’s funny that the legion of investors who once said GAAP revenue and profit were not worth mentioning are suddenly convinced that companies need to be profitable, or at least on a path to get there. Getting to profit while still growing significantly is now a sign that you have created a “real” business.
· Smarter Decisions — Battle tested from budget cuts and the long road to profitability, we’ve got an entirely different perspective about spending money than we had in the days of raising venture. The entire company is a lot wiser and makes better decisions on their own.
· Re-Invest in People — Now that we’re profitable and growing we can offer new benefits and compensation that makes fiscal sense. We just announced an annual bonus plan for all employees, and have sent folks to conferences. We’re not spending stupidly, but we are investing in our people from a position of strength.
Perhaps most importantly, we’re just a happier group of people. There’s no longer the burn rate Sword of Damocles hanging over our head. We all have a big “win” under our belts that we keep safely in the pride bank. And working together to hit this goal over many months has given us the confidence to reach higher and treat our Life Date more like Day One.
One thing I’ve learned the hard way through nearly five years of leading a venture-backed technology startup is that you’ve got to find your own path. There are way too many blog posts and articles preaching what you’re “supposed to do” as a founder/CEO. Investors you meet with or read about can offer lots of great advice, but they are not in your shoes and have their own interests and theses influencing their advice. Question everything and realize that there is no magic playbook or path.
Aside from learning through trial and error, I’ve gotten the best advice from fellow company leaders. We have gone through the personal ups and downs that is never mentioned in blog posts and demo days. We usually cut through the crap with each other, and desperately want to help each other avoid the land mines. I hope this post provides a helpful perspective for you — and I hope you, too, lean forward to share your journey with someone else on the path.
Bob Gilbreath is co-founder and CEO of Ahalogy, the Passion to Purchase Platform, and author of The Next Evolution of Marketing: Connect with your Customers by Marketing with Meaning. Follow him on Twitter.
