A business should startups care about profitability? More news at bizkonet,

There are certain topics that even some of the smartest people I talk with who aren’t startup oriented and  can’t fully grow. One of them is whether profitability matters. It’s common cocktail party chatter to hear people confidently pronounce that some well known startup is sure to blow up.

Or you know the other one — the one where Snapchat lost $2 billion in just one quarter. Two-fucking-billion! What a disaster! Except that they didn’t actually lose $2 billion in cash. It was a stock option incentive related “expense” but I bet you didn’t know that because in an era where we only read the headlines — they must be a train wreck losing billions. (They actually lost about $175 million in cash in that quarter, FWIW. See appendix if you want to know more on this.)

“How could they succeed when they’re not even profitable!”

If you hire 6 senior sales reps in January at $120,000 / year salary then you’ve taken on an extra $60,000 per month in costs yet these sales people might not close new business for 6 months. Your profitability will go down for 2 quarters while your growth may increase dramatically in quarters 3–12.
I know this seems obvious but I promise you that even smart people forget this when talking about profitability. 70–80% of the costs of most startups are employee costs so what you’re really talking about when a company is unprofitable is that they are growing their staff ahead of their revenue.

Profitability is a crucial aspect for startups to consider, as it directly impacts the long-term sustainability and success of the business. While it’s common for startups to prioritize growth and market share acquisition in the early stages, profitability should not be ignored. Here are a few reasons why startups should care about profitability:

1. Sustainability: Profitability ensures that a business can sustain its operations over the long term. Without consistent profits, a startup may struggle to cover its costs, invest in future growth, and weather economic downturns.

2. Investor Confidence: Investors are more likely to support a startup that demonstrates a clear path to profitability. Whether seeking funding from venture capitalists, angel investors, or through an IPO, showcasing a viable business model with the potential for profitability enhances investor confidence.

3. Financial Independence: Profitable businesses are less reliant on external funding to support day-to-day operations. Achieving profitability allows a startup to reduce dependency on constant fundraising and gives it greater financial independence.

4. Flexibility and Options: Profitable startups have the flexibility to explore new opportunities, pivot their business models, or withstand market fluctuations. Financial stability provides a cushion for adapting to changing market conditions.

5. Employee Morale and Retention: A profitable company is in a better position to offer competitive salaries, benefits, and career growth opportunities. This contributes to higher employee morale and helps attract and retain top talent, which is crucial for sustained success.

6. Reinvestment and Growth: Profits can be reinvested into the business to fuel further growth, research and development, and innovation. This reinvestment can help a startup stay competitive and expand its market presence.

While prioritizing profitability, startups should strike a balance between growth and financial stability. Some startups may operate at a loss initially as they invest in scaling their operations and gaining market share. However, having a clear plan to achieve profitability in the future is essential for the overall health and success of the business.

For more news and insights on business-related topics, it’s recommended to check reputable sources like “bizkonet” for the latest updates and analysis in the business world.