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Startups should make money

Written by Justin on July 29, 2015

Photo by the Smithsonian Institution

In 1999, you could get Kozmo to deliver a Krispe Kreme donut to your door in under an hour. For free.

People loved it: order a video game, book, or a snack, and it was at your door. The company was featured in an optimistic Forbes piece, where CEO Joseph Park proclaimed:

I’m going to put Amazon out of business.

Investors had given them $28 million to go out and increase their market share. A year later, with additional funding, they’d grown to over 400,000 members.

Around this time Michael Menduno, editor at Internet Retailer, made a prescient observation:

The premise behind affordable, same-day delivery is not entirely far-fetched. The problem: No one has figured out how to turn this logic into profit.


Call me old-fashioned but I’ve always believed that the purpose of starting a business is to earn a profit. An entrepreneur risks their time, money and energy with the hopes of a payoff at the end.

That seems clear to me.

And yet, in the startup culture, not everyone agrees.

Traditionally, entrepreneurs try to earn a profit by creating value for their customers. But startup “entrepreneurs” can go a different route.

Acquisitions.

Startup acquisitions create a whole new kind of payoff for people starting companies.

When you’re gunning for an acquisition, your whole aim is to make yourself look attractive to a much larger fish. This means growth. But not growth the way we used to think about it (“Johnson! Is revenue growing?”) but user growth. How many people are using your service? There’s this thinking in Silicon Valley that you can lose money as long as you’re gaining users quickly.

When did startup founders stop caring about revenue? Its the weirdest thing. It's like they think they can hide behind product and sign ups.

— Dan Martell (@danmartell) July 20, 2015

There’s always been mergers and acquisitions, but not on this scale. Now, founders are looking for their Instagram moment. Instagram grew to 30 million users, and despite having no revenue, was acquired by Facebook for $1 billion in 2012.

The idea of building this kind of unicorn is the new dream.

The devaluation of sales

The downside to a culture obsessed with user growth, is we’re raising a whole generation of “entrepreneurs” who have never sold a thing in their life.

“Making money takes practice.”
– Jason Fried, Signal vs Noise

I started at a young age: a shy kid, going door-to-door selling trinkets out of a catalog. In high school I sold homemade t-shirts and concert tickets. By college I’d graduated to selling web development services. In my professional life I’ve had 15 years of selling software, digital goods, and recurring monthly plans.

Even with all that experience, I still feel like I need more practice with sales.

I think anyone can learn sales. But if a founder’s whole objective is to get acquired by Google, Apple, Amazon, or Yahoo, they’ll never learn.

Where to start

Ultimately, I’d like to see more profitable businesses. But I realize that reaching profitably can take time. At MicroConf, Ted Pitts had a great talk about how it took his company 12 years to reach true profitability.

“Profit is what’s leftover once you’re paying yourself a market salary.”– Ted Pitts, MicroConf 2015

So let’s start by encouraging new companies to earn revenue, with an eye on becoming real, profitable businesses in the future. This means encouraging young entrepreneurs to get out and sell something.

My first day in the software business, my boss handed me a phone and told me to follow-up on inbound leads. These are the kind of practices we need in our industry.

I’m encouraged by programs like Gumroad’s Small Product Lab that help people make something small, put a price on it, and put it out in the world.

How to evaluate success

An acquisition is like a wealthy collector purchasing a race car before it’s won a single race. In the startup culture, the car is hailed as a champion, despite the fact that it’s never won a trophy.

Instead of basing startup valuations on hazy metrics like eyeballs, signups, and traffic, let’s base them on this simple formula:

revenue – expenses = profit

Let’s start acknowledging the teams that build a car to race, get it on the track, and win some races.

One big thing tech founders *really* underestimate: How good it feels to go profitable.

— Marc Andreessen (@pmarca) August 12, 2015

Cheers,
Justin Jackson
@mijustin

BTW: is your startup looking for a way to earn more revenue? I’m writing a book about that.

Postscript:
Kozmo, after taking an additional $60 million investment from Amazon in 2000, had it’s user count soar to 400,000. But, as Bloomberg Business reported, “the pesky little problem of making money remained.”

In 1999, Kozmo had sales of $3.5 million in 1999, but lost $26.4 million.

In 2001, Kozmo shut its doors and laid off 1,100 employees.

(Kudos to Nate Kontny for suggesting Kozmo as a case study)

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