Profitability is finally a hot topic in Startup World, especially for venture-backed companies that have traditionally front-loaded their spend in hopes of making profits on the back end of recurring revenue. But now you need both growth and profitability to be an attractive and healthy startup.
That can seem like an impossible feat, but it’s attainable as long as you are intentional in a few key areas. These are some of the concepts that have helped us at Text Request make it onto the INC 5000 list of fastest growing companies multiple times while maintaining profitability and without taking outside capital.
1. Know what resources you have from the start.
Every startup has two primary resources—time and money. You can spend more money to make up for time, or you can take your time if you don’t have the money to spend (or choose not to spend it). Every decision you make related to growth is looking for a balance between these two.
Sometimes you have to spend money to make up for time, like if a competitor is gaining on you. Sometimes you have to use time to make up for money, like when you’ve run out of spare cash. There are no perfect decisions here, it’s all a trade-off. But you’ve got to know what you’re working with.
2. Have a plan to pay your company back.
I’ve never been afraid to spend money, but there has to be an expected return on investment (ROI), and an expected time frame in which to get it. There must be a solid plan. You cannot do something because “it’s a good thing to do.”
Too many startups spend money on something without a plan to return the funds. You do it to get free users or exposure or some other benefit—but you’ve got to be able to pay back your cost to acquire within a short enough timeline that you can put that money to use again to get more customers. The right payback period varies by company, but we look for 3-5 months.
3. Test small, then bet big.
Every growth attempt is a bet. You really don’t know if something is going to work, even if someone else has done it before. Every target market, every product, every customer relationship is different. So test small, for free if possible.
If you see traction, then make a bigger bet on the same thing, and bigger, and bigger so long as it keeps working. If it’s making you enough money to grow while restoring your cash reserve, then keep it going until it stops!
4. Constantly re-evaluate.
One reason startups often beat legacy companies is that startups are not so entrenched in procedure. You don’t have to stick to the same budget that was set eight months ago, for example. You can move much more quickly, and that gives you a big edge.
If something’s not working, cut it and reallocate. If something is working, spend more on it. But you have to scrutinize this daily, otherwise it can get away from you. “Set it and forget it” isn’t an option. You’ve got to be very hands on. You’ve got to continually maximize, optimize, and adjust your growth spend. It takes a lot of work, but so does building a healthy and fast-growing company.
5. Hire affordably.
This is not a call to underpay your employees. You should definitely take care of them. But you pay a premium to people who’ve already done it before. Meanwhile, there are plenty of hungry, hard working, and fully capable people who are less experienced or who come from a different career path. Take a chance on them.
The failure rate on this is higher, but it can work out well for both you and that employee. Look for folks who share your values, are constant learners, and—if you can find them—someone with something to prove. They’ll go far fast. As you have discretionary funds, consider bringing on more.
Bonus: It’s okay to go slow early to go fast later.
Startups are constantly telling a story of fast and massive growth. There are a lot of reasons for that, but it’s important not to get caught up in the hype or fear of missing out. If you are trying to grow quickly because it looks like others are growing quickly, you’re going to make financial mistakes, and those can jeopardize your entire company. You don’t want that.
Instead, especially early on, be hyper vigilant with your spending. Make sure customers are willing to pay for your product, and that you can bring them in inexpensively enough to keep the lights on. Go slow and get it right.
As you find product-market fit (customers are willing to pay you and would be sad if you disappeared), then look for channel-market fit (you can acquire new customers for a reasonable price), and then begin making bigger bets while you look for scalable unit economics (you make money on every sale).
Do all of that, and you’ll be able to create significant growth while keeping costs relatively low.
ABOUT THE AUTHOR:
A serial entrepreneur, Brian Elrod is cofounder and CEO at Text Request, a business texting solution.