Dear Entrepreneurs Looking for Funding: There Is This Crazy Thing Called Profitability

Are you looking for funding? Sure you are. After a financing round is before a financing round, I know this saying. And even if you have just started your business, you are probably already thinking about how to get the finance needed to meet your plans. So, you are certainly looking for investors that might be willing to invest in your company, or to be more precise, to invest in you – as the founders and management team. Because by the way, we investors actually invest in YOU.

And yes, you are fortunate. You have founded your company at the right time. Money is out there to be invested. We see hundreds of millions flowing into postmates, deliveroo, foodora, snapchat and the like. Company valuations go through the roof. Another unicorn with a valuation of one billion dollars… and another one…. you may think from time to time.

But is this really sustainable and will this go on forever? Or will we see another bubble bursting? Well, we will see (deliberate ambiguity for those who read carefully).

So, congratulations for those of you who could convince investors to invest in you without having a business plan showing profitability on the horizon.

But this little article is actually meant to help young entrepreneurs and startups that are now establishing or revising their business plans. Certainly, you can create a plan reflecting a freemium business model where you scale your business fast, where you call it a land grab case and where you tell your potential investors that you will monetize after years of scaling and burning cash. I personally like something like “I know, customers do not pay for our products and services yet but believe me they will eventually do.” or “It is a really good product, customers must pay for it.” Or you may try to convince investors with “Now it is the time to use our first mover advantage (as a side note, if there actually is something like a first mover advantage) and rapidly scale. We will become profitable later on.”

I certainly know that there are indeed companies out there that have successfully implemented these strategies (Amazon is a perfect example of a business without years of profitability) and that have received funding on the basis of business plans not showing profitability for a long long long time. But please bear in mind that building a business and investing into a business as an investor (at least eventually) is also about earning money.

So, if you are about to create or revise your business plan in order to raise money from investors, please demonstrate a plausible way towards mid-term profitability that comes with an amount of funding that makes an investment attractive for an investor. And please be so kind to avoid scaling your business without having achieved product-market-fit. First you understand your customer (BE CUSTOMER-CENTRIC). Then you make him or her pay for it so that scaling the business makes sense. THEN you scale.

Or in other words: First, you crawl and test your MVP/product or service in a lean startup manner by repeatedly going through the build-measure-learn loop. Then, you walk and establish processes that ensure that you can run and scale the business. If this has been accomplished, you run and scale your business profitably.

Great! Hopefully, I am your investor if you learn to fly and become one of the outstanding unicorns that have made the step from good to great and that have become a profitable sustainable business!

I keep the fingers crossed that you will be among the startups given to fly.

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