As a startup advisor and investor, I find that more and more entrepreneurs avoid using the term “profit” in pitching their new venture. They seem to feel it conveys a message of personal enrichment at the expense of others. My view is that the purpose of every business is to make a profit, as fuel for growth, sustainability and social impact. Without profit, there is no business.
By profit, I simply mean offering a product or service to customers for a price that exceeds the total costs associated with the solution, thus providing some basis for recovering sunk costs and generating a return for stakeholders. Of course, I understand and do not condone bad actors who get greedy, and exploit ways to unjustly squeeze customers and employees.
Thus, I was pleased and a bit surprised to see a new book, “The Purpose Is Profit,” by Ed “Skip” McLaughlin, an entrepreneur who has both succeeded and failed in starting multiple businesses. He lays out very plainly his own experiences on both sides of this equation, and I particularly enjoyed his summary startup roadmap of 21 steps to success, which add real content to the eight that I recommend to every entrepreneur:
1. Select an idea you can clearly communicate in 30 seconds. Every entrepreneur needs a good “elevator pitch,” which succinctly describes the idea, the customer value proposition and business profit. Customers and investors are looking for specific solutions, not abstract ideas or complex technology concepts not yet materialized.
2. Solve a painful problem for customers who have money to spend. Solutions that are “nice to have” or “improve usability” are easy to give away but hard to sell. The same is true for solutions to some social problems, like feeding the hungry who do not have any money. Remember you cannot sustain a business or social cause with no revenue or profit.
3. Be able to differentiate your offering from competitors. The best differentiation is a patent or other intellectual property that also provides a barrier to entry. A commitment to work harder than competitors, or survive on lower margins, is not convincing. Customers typically will not switch to a new vendor for less than a 20 percent cost advantage.
4. Validate your business model on real customers. Giving free beta copies of your solution to customers to elicit testimonials does not validate a business model. Investors look for sales at full price, to people you do not know, to validate demand, price and margin. The best business models benefit social needs as well as business needs.
5. Show an aggressive marketing and sales plan. With today’s rapid pace of change and information overload, word-of-mouth and social media alone is not a viable marketing plan. Every business requires spending money to make money. The smart ones identify and budget innovative approaches, and use metrics to tools to monitor effectiveness.
6. Generate a 5-year financial forecast from opportunity data. If you do not set some financial targets for your business, investors will not be interested, and you will not know if you are making progress toward profitability and sustainability. Commitment to a set of financial objectives is the point where an entrepreneurial dream becomes a business.
7. Show that your team has the distinctive competence to win. The right people make all the difference in a winning business. This is why investors invest in the team, rather than the idea. Investors look for key leaders who have domain expertise and prior startup experience. Experience in other business areas and large corporations is not enough.
8. Build a long-term growth strategy and exit plan. Successful entrepreneurs look beyond profitability to change the world and leave a lasting legacy. Investors look for an exit strategy to allow them to capture a return on their investment. Customers and employees want a business with staying power and constant innovation for longevity.
Pundits may argue that recent business successes through user growth — including Twitter and WhatsApp achieving unicorn status (billion dollar valuations) — show revenue and profit are no longer needed. I will assert that these represent the exception, rather than the norm, and most sources agree that this is a fading anomaly, rather than a model for future business startups.
Therefore I recommend that every new entrepreneur should carry profitability as a key objective, rather than an embarrassment. Social entrepreneurs need profits to supplement those unpredictable donations if they are to achieve sustainability and a lasting social impact. Certainly, profitably alone is not business success, but business success without profit is hard to imagine.
Image credit: CC by 401(K)_2012