Building Profitable Startups In A VC World

Just post the 90s tech bubble bursting, 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.

I thought about my startup as a business. Businesses are profitable.  They don’t have to be huge, they don’t have to be disruptive, they have to be profitable.  I wanted to make a business. 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 happy kids and profitability. 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 the second rise of tech religiously and gonzo for nearly a decade. From what I have seen, four out of five 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. Sure, there are cases where funding makes sense and is the right thing to do – if you are growing too quickly or need a boost to sustain you to tip your revenues or need to invest in very expensive technology.  But how many well-funded startups can you think of that are not in these categories?  So why do so many people do it? 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 an obstacle. More cooks in the kitchen, less equity, and too much comfort to feel the fire that leads to profitability.  Why would that be the end goal? It took me a while, but somewhere along the line, I found the answer – it’s not.  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 the world better and 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 raised, 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. Many potential founders know how to code and are pretty damn good at it. They can build their product from the ground up. They have the vision and drive.  So why are they 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 profitability. Profit, profit, profit. That’s the mantra business owners need to have. It’s time to go back to your roots and follow a strict timeline for execution without funding. Get funding when you need it, but for now, focus on the business.

Tilak

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