The Powerful Habit of Profitability
“One of the problems with raising money is it teaches you bad habits from the start. If you’re an entrepreneur and you have a bunch of money in the bank, you get good at spending money. But if you’re forced to generate revenue from the beginning, what you get really good at is making money. And that’s a much better habit for a business to work on early on.”- Jason Fried
A string of posts kicked off over the weekend debating the pros, cons and tradeoffs made by startups torn between fast growth and profitability. The two that filled my feeds the fastest were Mark Suster’s and Fred Wilson’s.
The title of each post poses the question of whether a company should care about profitability. Both paint a fairly vivid picture of the tradeoffs a company should or could make in pursing subsidized speed over plodding towards profit.
As we unpack our Indie.vc theme and spend a lot more time with founders who were able to grow companies to enviable scale at breakneck paces with little to no outside funding a pattern has been emerging that suggests this may be a false choice.
Many of them have taken posts from VCs and VC backed founders at face value, executed those playbooks and… nearly driven their companies into the ground.
Not that it’s necessarily bad advice.
It is GREAT advice from a very small subset of businesses. And truly terrible advice for everyone else.
Despite rapidly changing economics and underlying infrastructure many startups and their backers continue to run a fairly dated playbook as it relates to what scale and speed look like and the costs to achieve them.
Fred’s comment particularly rings true here:
There is this idea that you can’t grow really fast and be profitable at the same time. There is also this idea that you have to keep adding engineering and product resources as you scale your business. And there is this idea that more salespeople equals more sales. I have found that all three of those ideas are wrong to some extent. And I have found that really strong execution in product, engineering, and sales, based on doing less, not more, and based on having a high performing team without a lot of baggage, will allow your company to grow fast and be profitable at the same time.
More people, more products and more money rarely lead to speed. And often, lead to sloppy spending, unnecessary overhead and bad habits that take years to unwind. So many of the reasons founders give themselves needing to continue to raise and grow unprofitably are simply unfounded and untrue in TODAYS startup environment.
Fred goes further to describe working with a handful of his companies to unwind these bad habits, and discovers that maybe this idea of trading speed and scale for profits is actually a false dichotomy.
It has been enlightening to watch what has happened with this cohort of companies. They have kept growing, sometimes at a higher growth rate than before the belt tightening. They are better places to work, more stable, more focused, and more successful. They are better companies and they are more valuable companies. They are easier to finance and they are easier to exit.
Which is why the quote above from Jason Fried deserves far more attention and weight from founders.
Time spent developing the habits of generating revenue and profits early will lead far more companies to long term success than will developing the habit of raising money every 15 — 18mo. and spending 6 — 12mo. ahead of anticipated growth.
As we say right on our homepage:
The founding DNA of a company is critical to its success. Early patterns and behavior shape everything that comes after. At Indie.vc, we believe that companies with a focus on making a product customers love and selling it at a profit from the very beginning have a distinct long term advantage over those who don’t. We’ll trade slower, thoughtful, compounding growth over scaling fast and failing fast every time. Scaling a business through happy customers and revenue is no harder than breaking the addiction of spending other people’s money. The freedom and benefits of that focus are manifest in every aspect of a company’s culture. Startups bleed red, real businesses bleed black.
We've seen the value of this habit play out over and over again in the companies we work with and speak to. An early focus on profitability is the surest foundation from which to scale, sell or raise.
Profitability is the immovable milestone.
And, in the current market, it is the most overlooked and undervalued habit in all of startupdom.