The days of companies raising vast amounts of VC cash at high valuations are over for most. Now, founders need to find ways of not only staying afloat, but becoming profitable. That means focusing on the top line — bringing in solid revenue — and on your customers, who are the engine that will keep your business chugging along.
Marek Talarczyk is the former CEO of Netguru, a digital innovation consultancy that has been profitable since its inception and never took on external funding. In our Startup Life newsletter, he gives his top tips for setting your business on the path to profitability.
Switch up your mindset
If you’re an unprofitable business that's been reliant on VC money, now's the time for a reality check. Founders can't raise huge sums of money anymore, and investors are looking more closely at runway, burn rates and how soon a company could reach profitability.
Run your business as if you may not be able to raise for an indefinite period. Becoming more self-sufficient will benefit you in the long run as it will better position you to receive funding when the market improves and will give you an advantage over your competitors (if they still exist by then).
Increase revenue
The biggest mistake I’ve seen companies that want to become profitable make is to focus too much on reducing costs. Instead, focus on increasing revenue — I’d say reaching profitability is 80% about revenue and 20% about costs.
To increase revenue you need to focus on your customers. If you don’t have enough customers, you need to invest more on sales and marketing. If you have enough engaged customers, you need to think about how to bring more value to them, and then upsell them.
Figuring out the latter involves being aware of where the customers already see the value in your product or service and then expanding on that. Talk to your customers more frequently — ask what they love or don’t love about the product and how it could be better — and act on their feedback.
Look at your pricing
Research shows that the majority of companies, especially B2Bs, underprice their products and services. If you have a good number of satisfied customers for a specific product, consider upping your prices. It’s a good time to, because consumers have already adjusted to things being more expensive in the last year thanks to inflation.
Don’t abandon growth
Founders can’t drastically reduce the cost of their product or service to entice new customers and undercut the competition, like Uber did back in the day. Instead, you need to make sure you have product-market fit.
Test the waters by putting the product out there and seeing if it works with customers. Talk to them and ask them for their feedback. If you don’t see the market for your offering, you need to pivot — and maybe not just once, but a few times.
There’s often a myth passed around that you can’t be profitable and grow, but that’s not true. The sweet spot for any company right now is being profitable and growing between 30-50% a year.
Reduce burn
In the past, companies would have several teams pushing a product in several different directions without being certain whether it was going to work out. Now, even big companies don’t have the money for that kind of experimentation. Before you fire up any new products or projects, you need to assess whether a) it's something that your customers will love that will bring in revenue and b) you can execute it well with the resources you have, without incurring further cost.
Also, don’t hire new people unless you’re really sure that you need them — especially if you're an early-stage company that's pre product-market fit. Keep your team as small as possible for as long as possible, to give you more flexibility if you decide to pivot. Use freelancers and agencies instead to scale your product.
On the subject of... being profitable
Grow your top line in a down market. As Marek says, companies shouldn’t only cut costs during a downturn but increase sales and improve margins. Here’s Harvard Business Review on how to do that.
How scaleups are approaching profitability. Sifted asked Bolt, Babbel and Refurbed for their tips.
Pricing during a recession. Adjusting prices involves understanding your customers, costs and competition.
