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Should startups care about profitability?
There are certain topics that even some of the smartest people I talk with who arenât startup oriented canât fully grok. One of them is whether profitability matters. Itâs common cocktail party chatter to hear people confidently pronounce that some well known startup is sure to blow up.
Or you know the other oneâââthe one where Snapchat lost $2 billion in just one quarter. Two-fucking-billion! What a disaster! Except that they didnât actually lose $2 billion in cash. It was a stock option incentive related âexpenseâ but I bet you didnât know that because in an era where we only read the headlinesâââthey 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.)
âHow could they succeed when theyâre not even profitable!â
If you hire 6 senior sales reps in January at $120,000 / year salary then youâve 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 3â12.
I know this seems obvious but I promise you that even smart people forget this when talking about profitability. 70â80% of the costs of most startups are employee costs so what youâre really talking about when a company is unprofitable is that they are growing their staff ahead of their revenue.
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