Be Profitable From Day One
I often hear entrepreneurs state that they are willing to lose money on their first project. They believe that because they are a new startup that is trying to penetrate a crowded marketplace, they should be prepared to lose money just to get noticed. I don’t agree. What happens after you do your first project? Do you then need to do a second unprofitable project to get noticed even more?
I believe that every business needs to be profitable from day one. You have to be profitable even when you have no business being profitable. How is this possible? It is possible if you are willing to dig with your own hands until you have the money to buy a pick and a shovel and if you refuse to take on a cost that you can’t cover.
That’s the approach I took when I started TEOCO – called STG in the early years – back in 1995 as a consultancy business. I negotiated hard to get the best possible hourly fee for my services. Then I worked diligently for three months without pay to have enough money in the bank to hire my next employee and move the business forward. Of course, there are cases where this approach won’t work. For example, if your business requires a lot of upfront investment for product development- say you want to launch a satellite into outer space. Or if you want to develop a very ambitious new software product. But I strongly recommend bootstrapping to the degree that it is feasible.
I remember back in December 2002 when we were considering acquiring a lead-generation company called Respond.com. At that time, their monthly revenues were $300K per month and monthly expenses were almost $600K per month. I was told that the company would become cash-flow positive “within a year,” but no one could articulate exactly how they planned to make that happen. Once we acquired the company, we put a strict cap on monthly expenses- one that was safely below their revenue. This allowed us to achieve a pre-tax profit of over $500K in the calendar year 2003.
This was possible through my mantra of ‘being profitable from day one’ – and keeping this mindset at the forefront of our strategy. So, unless you are planning to launch a satellite into orbit, maintaining a laser focus on profitability must underpin every step of your entrepreneurship journey – whether you are taking on your first startup or making your 3rd acquisition.
With special thanks to Srinivas Bhogle for his support and contribution to this project.