It turns out that pigs can fly….and startups can actually focus on profits rather than pursuing growth at all costs.
With startups having a tougher time attracting capital, they’re been forced – yes, forced! – on the bottom line and frugality. The new world order means startups have to drive revenue (aka when customer pay for your product) and make more money than they spend (aka profits).
In the “normal” business world, this sounds like a straightforward approach. But startups have been allowed to operate differently. They have focused on getting popular before they have to worry about pesky things like sales and profits.
Why let financial fundamentals get in the way of growth at all costs, particularly when that growth is backstopped by a few million dollars of venture capital?
This approach is not only bad business, it’s a bad way to operate a business.
Real businesses create a product that people want to purchase. It’s product-market fit in a financially viable way. Companies that spend lots of money but can’t make the numbers work are hobbies or vanity projects.
It’s fascinating that profits have come back into vogue. All it took was some softness in the capital markets and concerns about the bubble bursting to convince people to jump on the profits bandwagon.
Call me old school but the whole concept of “build it and we’ll figure out how to make money later” is terribly flawed. It is a model built on assumptions and faith that something will materialize that makes sense financially. This optimism allows entrepreneurs to heavily invest in services that may provide a lot of value and utility but don’t know how to get people to pay for them. If that’s not a recipe for disaster, I don’t what it is.
In some respects, the “no business model” (NBM) startup is like the emperor with no clothes. Everyone lavishes praise at them and celebrates the growing number of users but the business is naked financially. This, for whatever reason, has become the new normal with few people poking holes in the NBM model.
But now the landscape is changing. With capital more challenging to attract, startups need to become businesses….and they need to do it quickly. The pretenders – startups with no business models – will be exposed, while startups built on a solid financial foundation will survive and thrive.
This situation is not unlike the original dot-com boom in which startups that were little more than vaporware were able to trick people into investing in their IPOs. When the dust settled, many of these one-time stars evaporated because it was all hype and no business. There were, however, legitimate companies that had enough money and revenue to survive the dot-com bust. When the market rebounded (remember the excitement over Web 2.0), many of them thrived as online business became all the rage.
As much as there may be a lot of financial carnage on the horizon, it is not all bad news: startups with business models and growing businesses will likely have to deal with competition. It will create a healthier and more viable ecosystem when the wanna-be startups disappear.
More: According to Business Insider, Dropbox is embracing the frugality trend by cancelling a free shuttle in San Francisco and its gym washing service.
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