HQQA041 When will you be profitable?

When will you be profitable? – Everyone loves a good promise

Here’s what they mean

It is expected that a startup will be profitable at some point. So when will it happen to you? When will you be profitable? Every investor would want to know.

This is a loaded question. Where do you start?

Laughing out loud and smacking the table with your hand is not the way to deal with this.

The ideal answer would be based on demonstrating optionality and the trade-off between growth and profitability. For many companies, you can choose to get profitable, but it comes at the expense of growth.

You could assert that your key focus is to grow to a point of scale at which point you have the option to continue scaling or to focus on profitability. That’s a nice place to be since you are not dependant on the investment climate for your survival.

Remember that, privately at least, VCs only care about growth. If you can keep growing, they want you to keep raising and getting really big. However, if the investment environment gets negative, they will expect you to magically rear in costs and get profitable so you don’t die!

There are two examples of this I can remember.

In 2015, Bill Gurley of Benchmark warned startup unicorns to prepare for leaner times. We tweeted:

“We may be nearing the end of a cycle where growth is valued more than profitability. It could be at an inflection point.”

In 2008, Sequoia’s wrote a 56 slide doomesday presentation etitled “R.I.P Good Times.” The core message? Spend every dollar as though it were their last.

Now, this question(“When will you be profitable?”) is something more traditional investors would ask. By that, I mean anyone who doesn’t understand tech. Most VCs would never ask this to an early-stage company. If you get asked this by a traditional investor you might need to explain how the game works. Which can kill a deal, but at least you won’t get stuck with someone who pushes you to act in a way you don’t like.

What you need to say

“At present we are subscale. There is no way for us to be profitable until we have approximately 1,500 customers and an adjusted cost base.

Once we have reached this customer milestone we have an option between scaling up to a significant company or focusing on profitability. Naturally, there are consequences to our valuation and exit options.

Once we have better insight into our payback period and LTV, we should be able to have a clear line of sight on what it would take to become profitable. This would give us the option to be profitable if the investment climate was negative. I believe it would take us two years to be profitable if we took that route.

Let’s be clear, we’re gunning for a large exit, not a small one. Can we make sure we are on the same page of the scale of business we want to build, to avoid any surprises in future? I think this is important.”