To grow or to profit, that is the question!
There we are, with a fistful of profit in our hands (finally!) and an endless list of places to spend it! Do we hire another engineer to get our product shipped faster? How about increasing our marketing budget to scale customer acquisition? Or, and let’s just get crazy, do we finally pay ourselves?
Profit First, then Grow
I’m going to go out on a limb and spat in the face of startup lore, which suggests that the only way to succeed is to bet the farm and grow. Think of me as the owner of a casino (in this case, that casino is Startups.com) who gets to not only witness a handful of people bet it all and get rich, but 100x more bet it all and fail.
What we miss in our passion for greatness is that it really helps to be viable long enough to ever get there. So many startups “grow” themselves into bankruptcy without ever focusing on longevity. Profitability isn’t just about making gangster money, it’s about creating a repeatable pathway to viability. Even $1 of profit allows us to sustain forever, but $1 of consistent losses has a very different outcome.
Growth as a Portion of Profit
This isn’t to say we’re going to take our tens of dollars of profit and pour it into our Scrooge McDuck money vault. We still want to be able to feed the business as well as ourselves. Instead, we should think of how our “profit allocation” and our “growth allocation” so that we’re not over-optimized for one single outcome.
Now, the downside of this allocation is that we’re going to grow less quickly – and frankly – that’s probably just fine. We’ve become fascinated by the speed of growth as a community, and yes, that’s fun when it happens, so long as it’s not coming at the expense of longevity.
Not Every Bet is Equal
Not every dollar we allocate towards growth is the same bet, either. We basically have two categories — bets that we can take back easily (like reducing a paid marketing budget) and bets that are a massive problem to unwind (like hiring!). When we think about allocations at Startups.com, we often group those bets into two different categories, making the “retractable bets” first, and then, if we’re feeling frisky, making the “pretty friggin permanent” bets second.
What this allows us to do is gamble a bit with our house money (profit) and see if we can create some wins that allow us to then advance those winnings into more permanent bets. A lot of Founders won’t decouple those categories and will assume any bet on growth is the same. It is, until it doesn’t work, and you have to CTRL-Z that decision.
Growth is a Luxury
Just because we’re a startup doesn’t mean we are entitled to growth. Growth is what we earn by creating profit. Obviously, there’s a time and a place in many startups where we have to invest at a loss in order to achieve profit, and that’s fine, but those investments should have a timeline for that profit to materialize.
Instead of saying “Let’s burn through $5 million of investment and see what happens” we should identify earlier milestones that help us achieve viability first, so we have the luxury of further growth. My concern isn’t with more Founders growing, it’s with more Founders being around long enough to succeed at all.