Startups around the world have been building their 2017 strategic plans and presenting them to boards, investors and senior teams. Behind the graph-stuffed PowerPoints and Excel lies a crucial question. Will you be profitable in 2017? I argue that most firms don’t need to choose growth over profits and can (and should) pursue exponential growth and profits simultaneously. This is a what-to-do guide not a how-to guide but there are specific programs and steps behind everything here so reach out for more details.
Our world values growth and big exits over all else, which makes profitability a contentious topic. VCs and startup founders get into the game to make some history. VC’s are hedging their bets and founders are highly aspirational so the last conversation they want to have is about focusing on profits instead of the glide path to an IPO (or strategic acquisition). Invested money is sunk cost. Depending on the stage and check size of a VC’s investment strategy you need returns in your portfolio of 10x to 50x (or better) for the failed deals to back out to a >20% annual return on the fund.
Conventional wisdom suggests that profitability is an alternative to fast growth and is therefore an acknowledgement that you cannot find high-growth initiatives to fund. Some companies only really take profitable growth seriously when they have no other choice. Usually this happens after they have made the mental switch in their exit strategy from working towards a strategic exit based on non-financial measures to a more financially-driven exit. In other cases, their startup investors are getting fatigued and leadership simply acknowledges that they are not going to raise more money without demonstrating they can generate profits.
- Stop Calling Yourself A Startup
- Apply A Microscope Then Scale Like Crazy
- Shift Focus From Cash Burn to Operating Cash Flow
- Think about time differently
Rapid, profitable growth is possible. Accept this and your world opens. It may require a complete reassessment of your business model and it usually requires a reset of your firm’s operating model but the solution is there if the fundamentals of your concept is solid and your team can execute. Profits not only signal to investors and other stakeholders that your startup can be a real business but it can calm nerves, open a lot of options and shifts the ownership of the future of the firm away from things the leadership cannot control (strategic M&A, the markets, VCs) to things they can (their own execution).
Once the startup leader is behind shifting to profits then you need to get the team you need on board. Not everyone will come along so you need to get people on board, or out of the way, as quickly as possible. You should enlist investors and board members who are on board to help get and keep the others there too. The same with the team. Accept that not all of them will. Leadership is about doing the right thing, not managing through unanimity. There are right ways and wrong ways to get there so plan this out carefully. To get everyone focused and motivated you need new KPIs to align behind. Figure out the connections between people and activity in your organizations that lead to generating margin and make sure there is ownership, incentives and transparency about each one. Accept that this is going to require you manage and communicate differently. Connect the dots for people. Vision is critical but people are most happy when they understand shorter-term, more measurable goals and how their daily actions contribute to the company success so, if done right, this should be very positive for your best people.
One critical place to start is to determine the effect growth has on cash. Growth, even profitable growth can eat a lot of cash and you cannot run out. Cash flow and profits are not synonymous and you need to plan and work towards both. Many startups focus on cash burn instead of cash utilization. The premise is that more time equals more opportunity. Cash should generate more cash and then profits and how you do that will dictate your maximum growth rate. Dell, during its heyday, was a near-perfect example of how this was done right. Dell’s customers paid for computers that Dell had not yet built, made with suppliers’ inventory they were not carrying. Consumers loved the customization but it was the just-in-time manufacturing supply model that fueled the business. Operating cash flow was profitable and this meant that sale drove more cash which fed more growth.
By the time, you start generating revenue you probably tried and failed at a bunch of things and may simultaneously be supporting little mini-businesses, different processes, different customer relationships and often different revenue sources. Now put those things under the microscope, find the super profitable slice of your business, cull everything else around it, drill and optimize, optimize, optimize and now scale like crazy. The narrower you slice your view of the organization the more profitable you will find that activity gets as you look for that part of your business that is ready for scale. This means tons of difficult decisions and often means restructuring deals and it will cost your business some relationships and clients. That’s ok. Growing businesses often hold on to early users and customers thinking they are the foundation of the company’s success. But be clinical about it. If they are not contributing to cash and profits, then you are subsidizing your oldest clients at the expense of future clients. Be especially wary of you or others making decisions to keep a part of your business because they are ‘strategic.’ If you cannot measure the impact of effort or dollars spent, then it usually isn’t worth doing.
You may conclude that some revenue-generating part of your business, like professional services, marketing, sales, etc. will suddenly get a lot more attention. These are people so don’t assume they will welcome this shift or be the best people to get you there. Listen to them but hear what they are really saying. Don’t let people sway you from what the numbers say.
If you are concerned that focusing on operating cash and shifting priorities to scaling what works now will impact long term goals, then there are solutions. Long-term, capital intensive initiatives need to be reevaluated and you should be able to generate cash and then fund them from operations.
Like cash, treat time differently. Managing through cash burn means staying focused on runway. The goal is usually to demonstrate enough progress before you are forced to go get more cash and to give your ideas and project time to mature and bear fruit. This mindset must change completely. Time is now a crucial commodity. Incentivizing and managing people using new KPIs is essential here.
This was intended as a ‘what’ document not a ‘how’ document. But, there are proven, specific plans and programs behind each of these things. They have been tested and developed in three very different startups who all doubled revenues and made their first profits within a year. If you are a senior leader of a startup or board member and want to learn more I would love to hear from you.
Mike Zammuto is Founder & CEO of Cloud Commerce Consulting.
Mike has been the CEO/COO/founder of more than 10 startups with several successful exits. Mike also served as a senior manager at Microsoft’s product development headquarters in Redmond, Washington. You may reach Mike via our Contact page or through his LinkedIn profile.