There are certain topics that even some of the smartest people I talk with who arenâ€™t startup oriented canâ€™t fully grok. One of them is whether profitability matters. Itâ€™s common cocktail party chatter to hear people confidently pronounce that some well known startup is sure to blow up.
Or you know the other oneâ€Šâ€”â€Šthe one where Snapchat lost $2 billion in just one quarter. Two-fucking-billion! What a disaster! Except that they didnâ€™t actually lose $2 billion in cash. It was a stock option incentive related â€śexpenseâ€ť but I bet you didnâ€™t know that because in an era where we only read the headlinesâ€Šâ€”â€Šthey 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.)
â€śHow could they succeed when theyâ€™re not even profitable!â€ť
If you hire 6 senior sales reps in January at $120,000 / year salary then youâ€™ve 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 3â€“12.
I know this seems obvious but I promise you that even smart people forget this when talking about profitability. 70â€“80% of the costs of most startups are employee costs so what youâ€™re really talking about when a company is unprofitable is that they are growing their staff ahead of their revenue.