Building Profitable Startups In A VC World

June 2, 2013

In 2003, I had a problem. I had to renew my cell phone contract and get a new phone. The phone I wanted was too expensive at the Verizon store so I turned to Google to solve my problem. My search for “free cell phones verizon” introduced me to a world of cell phone retail websites competing for the number one spot on the Google search engine result pages. It didn’t take long for me to figure out three very important facts:

1) All of the cell phone retail sites I found were affiliates of the same company
2) They all relied heavily on search engines and SEO to bring them traffic
3) They all had a poor user interface with an unnecessary amount of steps to get from a-to-b

It was at that point I got an idea for my first internet startup: make my own cell phone retail site. I had all the steps figured out: find an affiliate program, build a website, do some SEO work, and boom! wait for the money to come in. My competitive advantage was going to be a [groundbreaking for that time period] minimalist user interface. The two year plan was to apply my revenue to hire a developer to maintain the site while I set out to build relations directly with the big cell phone carriers to increase my profit margin. I had a self-sustaining business model. It wasn’t perfect (how do you sustain the SEO with Google’s constantly improving search algorithm? how would I deal with black swans? if I hit the tipping point, would my servers scale? would major cell phone carriers want to work directly with a small two person company?), but I had a plan, determination, and most importantly, a profitable business model (revenues > costs). It was a good first shot for a kid.

I thought about my startup as a business. Businesses make money and I was in it to make money. The same way I did when I was in middle school selling juice boxes to my peers. I would take my profits, get a wholesale sized pack, and start all over again. I eventually expanded to pop-ice packets to increase my business. It wasn’t about raising capital, or having a cool office, or disrupting whatever. It was about making money. It was plain and simple: make it work, which meant, make it profitable. It’s such a simple concept, yet it’s so much more than what you see in startups from the past few years.

I have followed startups religiously for nearly a decade. From what I have seen, 4 out of 5 startups have no clear business model. They put something out, run prototypes or try to get traffic, then go get funding. But funding for what? An underdeveloped idea? When did that become a business? It seems like everyone I talk to aims to get funding for their idea, even before they figure out how to make their idea profitable. Logically that doesn’t make any sense. So why do so many people do it? It took me a while but I finally figured it out. It’s because there’s a certain romance around it. Fund culture is exciting and interesting, it’s something to be a part of, it’s a culture. I read about all these companies getting funding, seed funding, series a, series b, etc, and admire them. Funding is marketed as a success, a milestone, but also, indirectly, as an end. Over the last few years, I misguidedly joined the school of thought that getting funding is the only path to success. And, believe it or not, it was reinforced by everything I read, every interview I watched, and everything expert word that was spoken. It’s hard to not believe something you hear everywhere all the time.

Not too long after my cell phone retail startup, I found myself completely engulfed in fund culture. Fundability became my core principle. Every subsequent idea I got, I approached from a funding perspective: which one is most likely to get funded? I did this for years – using my free time to strategize business plans and pitch decks, while I could have been using that time to build the product and market it. Almost everything I read made getting funded the holy grail, and it took me a long time to figure out that it wasn’t. In actuality, funding is debt and debt is liability. In the end, liability reduces equity. Funding usually ends up in the reduction of equity and ultimately a reduction of money. Why would that be the end goal? It took me a while, but somewhere along the line, I reverted to my old school of thought. A startup is a business. “I don’t need funding to start a business! I just need to figure out how to make money.” It was a refreshing epiphany and it sparked my curiosity. When and why did my goal go from ‘being profitable’ to ‘being fundable‘?

Profitability and fundability aren’t the same. If you are profitable you will most likely be fundable. If you are fundable, you may never become profitable, no matter how much money you have, the underlying business model determines profitability. But it’s the culture. It’s the kids who never studied business but are consumed by the media. All the late teens early twenty-year olds highlighted in the media in their plaid shirts, uber-confidence, and a very clique-y network – it’s a lifestyle. Startups are synonymous with this image. VCs and investors say they can recognize a successful entrepreneur within the first few minutes of chatting with him. Sure – as long as he is a young, cool, confident guy with a plaid shirt, big ego, and an idea, he’s gonna be successful. It’s the cultural imprint that the media has left in our minds. Once you’re in and you have funding, boom! you’re the cool kid in town. But whatever happened to having a successful business?

Forget the romanticism and mainstream depiction of startup culture. Profitability should supersede fundability in budding startups. I feel like when I got the funding bug, it completely undermined my startup plans. It was like I had been on hold for the past few years. I had been waiting for funding, but I completely forgot that I could start a business without funding. I know how to code and I’m pretty damn good at it. I can build my own project from the ground up. I have a vision and the drive (I haven’t been starting business non-stop since grade school for nothing). I even have a formal education in CS and Business. So why am I thinking so single-mindedly about funding? It’s the startup culture. It’s distracting. Everyone wants to be one of the cool kids fitting the media image. That’s not what business is about. It’s about profit. Profit, profit, profit. That’s my new mantra. I’m going back to my roots and following a strict timeline for execution without any funding. I’ll get funding when I need it, but for now, the focus is on profit.

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