Lots of conversations with founders over the last few years about ‘reaching profitability,’ sometimes where we are on the cap table, and also just when a friend wanted some advice. I can tell pretty quickly whether or not it’s worth going deeper on what achieving this milestone would look like, and what we can do to help. The discerning factor is whether the CEO believes they’re playing offense or defense. Whether they see profitability as a way to increase optionality and likelihood of a positive outcome, or whether they just want to delay tougher conversations about viability and value.
Some common attributes of playing offense:
- Spending capital with the idea you can generate more than $1 of enterprise value for each dollar that goes out the door
- Managing another value-accretive KPI alongside profitability – eg betting that getting to $5m ARR -AND- profitable makes you more attractive as an acquisition target
- Building your own decision tree which has go/no go paths on the journey to profitability because you need to periodically assess the opportunity cost, the risk/reward equation, the buy-in from your team, and so on
- Willingness to use capital to buy back shares (at negotiated valuations) from investors in order to regain control of your company, unify your cap table, and reduce the preference stack to reward common holders
Statements or plans that suggest to me you’re playing defense:
- Managing simply to multiple years of burn left so you can say you’re ‘default alive’
- Avoiding discussions with your team and investors about what the value of a profitable startup might be, how that value could eventually be realized, and what it means for different classes of shareholders
- Believing you can pivot to profitability without any changes in culture or management practices
- Pinning your hopes on improved future outcomes with general statements like “maybe the market will be better next year”
Please don’t read this as “well, if you’re not going to be ‘venture scale’ you’re playing defense. just wind it down.” We have companies at all different stages of valuation and funding raised who are on offense by getting to profitability, and believe we’ll all make money together in these situations. No one is pressuring them to be something they’re not. But if you don’t have PMF, don’t have a team that’s ready to reorient the P&L, and don’t have the energy as founders to lead, ‘profitability’ isn’t a solution, it’s just a mirage.
Bluesky has the JUICE -> https://bsky.app/profile/hunterwalk.com