The ABCs of Profitability: How Pre-Series A Founders Can Leverage AWS to Build Scalable, Cost-Effective Startups

It’s no secret — the venture capital (VC) landscape has undergone significant changes post-pandemic. As a founder, it begs the question — how do you set yourself and your team up for success from launch?

Product-First Is Out and Customer-First Is In

It sounds obvious, but it wasn’t long ago that the product-first mindset had Silicon Valley in a chokehold. What was considered new and cool took precedence, regardless of whether or not customers actually wanted to use it. There were products galore that sounded really amazing and innovative in theory but in reality, ended up falling flat when the time came for customers to pay. The value simply wasn’t there and multiple recessions inside of a decade left the market unwilling to part with their cash for another feature-bloated subscription.

Soon enough, investors started realizing that their odds of ROI were getting slimmer and slimmer. So the stakes skyrocketed. 100X became the standard. All of the sudden, it took a unicorn to get a return.

And then, the pandemic happened. Obvious economic impact aside, the effect on the startup community was a sharp contrast to what we’d observed in years past. To get a check, you had to prove results. You had to have a little something called product-market fit. Headcount? Irrelevant. Downloads? Forget it. Even total revenue was on the chopping block.

The market has made a significant pivot towards products that are directly in line with what customers are asking for, and they’re not afraid to dig deep to find the metrics that matter to assess product-market fit. Taking a page out of Amazon’s book, it was time to get customer obsessed. Whether that’s through user research, focus groups, or running ads against a landing page to gauge interest — product inception starts with real, tangible challenges your future buyers experience today.

Traction Trumps Potential

No longer are VCs willing to invest in startups based on their potential alone. Previously, a great idea, a strong team, and a solid business plan were enough to secure funding, particularly in the early stages. However, the tide has turned, and investors are prioritizing traction.

Even angel investors, who traditionally back early-stage startups, are increasingly looking for evidence of traction before writing a check. This means that founders need to focus on validating their ideas and gaining initial customers or users before seeking investment.

Metrics Matter More Than Ever

VCs are also becoming more data-driven in their investment decisions. They want to see concrete metrics that demonstrate your startup’s growth potential and viability. This goes beyond just revenue and includes factors such as:

1. Net Retention: Starting strong with net retention, or how much you’ll grow or shrink without any new customer action. Frightening? Potentially. Enlightening? Certainly.
2. Burn Ratio: If you’re a startup on fire (in a good way) and cruising through cash to grow, this is your friendly reality check. Just divide your Net New ARR by your FCF Burn, and voila 🔥
3. Cash Conversion Cycle: CCC is all about how long it takes your company to turn investments into cold, hard cash from sales. It’s like a stopwatch for your inventory, receivables, and bills.
4. LTV by Cohort: Lifetime value is basically how much you expect to make from a customer before they churn. It’s all the sales they bring in after your cost of acquisition.
5. Contribution Margin: In a nutshell, it’s your product line or sales team’s bookings minus their costs. Knowing how much each department is pitching in is clutch for making smart investment moves.
6. CAC Payback Period: This is what you spend on sales and marketing to a new customer. It’s crucial to show that your go-to-market game is on point.
7. Sales Quick Ratio: Want a quick and dirty way to see if your growth is on track? Divide your Sales by your Churn. It’s like a health check for your sales machine.
8. User Activation Rate: Also known as the product activation rate, this tells you how many trial users hit the activation milestone. Just divide the number of users who made it by the total number who signed up.
9. LTM Revenue vs Gross Margin vs Profit Margin: Your P&L statement has three key components: Revenue, Gross Margin, and Profit Margin. Revenue and Profit Margin are the top and bottom lines, while Gross Margin sits in between. By tracking these metrics over the last 12 months, you can get a clear picture of your company’s financial health and spot any trends or changes in performance.
10. Customer Concentration: Landing big deals is awesome, but relying too heavily on a handful of customers can be risky business. Keep an eye on individual customer risk, so one big churn doesn’t tank your business.
11. IRR and ROE for Projects: The biggest mistake leaders make after investing in a specific part of their business is not measuring the return. Make sure to calculate Internal Rate of Return and Return on Equity every six months to stay on top of it.
12. Developer Productivity: Every CTO wants their dev team to crush it. High-quality, speedy application deployment means faster time to market (and more revenue). The key is knowing where to focus those efforts.
13. User Conversion Rates: Not all sales and marketing pipelines are created equal. Sure, you want to max out your funnel’s potential, but at the end of the day, it’s all about the conversion rate.
14. Gross Margin: This is your revenue minus the cost of goods. Higher margins mean more room to invest and grow.
15. Revenue Growth: Last but definitely not least, and probably the most important metric of ’em all. Here’s a handy rule of thumb: 6% month-over-month growth equals 100% year-over-year growth.

The bottom line is you must be prepared to present a clear picture of your key performance indicators (KPIs) and how you plan to scale these metrics over time. Having a solid understanding of your data and being able to communicate it effectively can make all the difference in securing funding.

The Path to Profitability Starts with the Right Infrastructure and Long Term Roadmap

Here’s how Protagona partners with founders and their teams to help them scale effectively (and profitably):

1. Cloud Infrastructure Optimization: We help you optimize your cloud infrastructure, ensuring that it’s not just a cost center, but a revenue driver. By leveraging AWS’s scalable, secure, and cost-effective solutions, we enable startups to focus on innovation and growth while minimizing technical debt and operational overhead. The result? Improved efficiency, faster time-to-market, and better overall performance that directly impacts your bottom line.
2. Data Analytics and Insights: We help you harness the power of data, transforming it from a mere byproduct of your operations into a strategic asset. Our team works with yours to assess customer behavior, market trends, and operational performance. These insights inform strategic decision-making, product development, and go-to-market strategies, enabling you to stay ahead of the competition and drive revenue growth.
3. Artificial Intelligence and Machine Learning: We help you identify and implement profitable AI and ML use cases. By enabling startup teams to build intelligent applications, automate processes, and create personalized customer experiences, we help you differentiate your offerings and tap into new revenue streams.
4. Cybersecurity and Compliance: We provide guidance on best practices for securing your cloud environments, implementing access controls, and meeting compliance requirements such as GDPR, HIPAA, or SOC. By ensuring your product is properly protected and compliant, we help you safeguard your valuable data assets and maintain the trust of your customers.
5. Due Diligence and Technical Assessments: Our technical due diligence services help you assess your tech and infrastructure.. By understanding the strengths, weaknesses, and scalability of your stack, you can make informed investment decisions and identify areas for improvement as prepare to scale, raise, or merger / acquisition.
6. Support, Mentorship, and Funding: As technical advisors and mentors, we provide guidance on architecture design, performance optimization, and cloud best practices to help your portfolio companies scale efficiently and cost-effectively. We also facilitate access to AWS funding programs, resources, training, and support designed specifically for startups, ensuring your teams have the tools and knowledge they need to succeed.
7. Strategic Partner Network: Our extensive network of technology partners allows us to recommend specialists in various fields, ensuring that you have access to the expertise for whatever needs may arise.
8. Co-Selling: We work with startup founders to help co-sell their products to the AWS network and make introductions to other clients or contacts who might benefit from their offerings.

Navigating the New Normal

Things are certainly different, but we’re confident that the fresh emphasis on actionable metrics is a good thing in the long run. By focusing on traction and choosing the right infrastructure, you can position yourself to attract investors and secure the capital you need to grow.

It also puts you in a great position for alternatives, like acquisition or simply running a profitable business without having to be continually reliant on capital injection.

As an AWS consulting partner, we specialize in helping startup teams build on AWS and leverage its full potential to drive growth and profitability. Whether you’re just starting out or looking to scale, we can help you build a solid foundation on AWS and set your startup up for long-term success.

If you’re a startup founder or CTO, we want to help! Reach out to us at contact@protagona.com.