Should startups care about profitability?
There are certain topics that even some of the smartest people I talk with who arent startup oriented cant fully grok. One of them is whether profitability matters. Its common cocktail party chatter to hear people confidently pronounce that some well known startup is sure to blow up.
Or you know the other one??the one where Snapchat lost $2 billion in just one quarter. Two-fucking-billion! What a disaster! Except that they didnt actually lose $2 billion in cash. It was a stock option incentive related expense but I bet you didnt know that because in an era where we only read the headlines??they must be a train wreck losing billions. (They actually lost about $175 million in cash in that quarter, FWIW. See appendix if you want to know more on this.)
How could they succeed when theyre not even profitable!
If you hire 6 senior sales reps in January at $120,000 / year salary then youve taken on an extra $60,000 per month in costs yet these sales people might not close new business for 6 months. Your profitability will go down for 2 quarters while your growth may increase dramatically in quarters 312.
I know this seems obvious but I promise you that even smart people forget this when talking about profitability. 7080% of the costs of most startups are employee costs so what youre really talking about when a company is unprofitable is that they are growing their staff ahead of their revenue.