The opinions expressed by Entrepreneur authors are their very own.
It’s no secret that the startup world is hardcore. Half of the startups will fail before the fifth yr, and only one in ten will survive in the future. The latest economic trends are also not optimistic. Last yr I saw a A decrease of 38%. in global startup investments ia 30% decrease specifically in the USA. Moreover, of the available funds, a significant part was consumed by fashionable artificial intelligence startups. So if you’re not using AI, the picture could seem even bleaker.
Today’s founders must come to terms with the undeniable fact that the VC funding round they have been working on may not materialize. While this has at all times been the case, the bar is now so high that a plan B is essential – how will your online business survive if it doesn’t get funding?
An increasingly popular option is alternative startup financing, e.g. taking out a loan from a traditional lending institution. But it’s not for everyone, and actually not for startups that do not make any revenue, because the bank must see how you’ll repay the loan. Moreover, collateral—or lack thereof—can disqualify any software or other startup in advance because, unlike VCs, banks don’t operate on faith.
So, if no one is giving you funding and you have no runway to sustain yourself until the ecosystem recovers, there is only one way for your startup to grow and that is to develop into profitable.
Why does profitability have to come back first, even if you’re doing well?
I have been actively fundraising for my on-demand packaged goods (CPG) startup since its inception three years ago. First, we raised $1.9 million in pre-seed capital to grow our core business, which we did – securing the needed partnerships, establishing a base of operations, developing our software, and growing the team.
With a solid foundation and a proven business model in place, it was time to scale and we looked for VC partners to assist us speed up our business. What I expected to be three to 6 months of energetic fundraising turned into a yr that turned into one other and continues to today.
Despite clearly positive business results and a lot of warm contacts and cool statements, the response of investors was indifferent. Interest got here with conditions and homework – “Let’s reconnect when you hit these numbers.” But when we did, the goalposts moved. Fundraising began to feel like a goose chase, and the increasingly turbulent economic environment also did not favor us.
There is a lot of competition at the moment, and startups that investors counted on just a few years ago may not get a second glance today. With this in mind, founders should avoid putting all their eggs in one basket and hedge their bets by approaching growth towards profit.
Because if you don’t, you have two equally unpleasant options: go bankrupt or be chained to an opportunistic investor who pays pennies on the dollar.
Three things a founder must do to be profitable
Four months ago, my startup achieved profitability for the first time. This was achieved after over a yr of energetic work and planning, and this is what it takes.
1. Change your way of pondering
The predominant task of a startup founder is fundraising – this is something that is practiced in incubators, accelerators and other mentoring programs. As such, the founder often focuses on beautifying his startup for investors, i.e., finding ways to extend KPIs even if it is unsustainable, focusing on design over functionality, and spending a lot of cash on marketing to display growth.
To achieve profitability, this should be unlearned. Growth can’t be cosmetic, and for many it requires a change in mindset. Goals and priorities must be redefined. Forget about maximizing registrations; focus on paying customers; forget about vanity metrics; focus on conversions; forget about your personal desires; focus on business needs.
Keep in mind that this does not imply you should stop fundraising, but you will probably have to revise your presentation.
2. Optimize your online business
Changing your mindset is not enough – you have to get in the ditch and optimize, optimize, optimize. For a regular company, the runway is limited and if you don’t improve your balance sheet, it’s game over.
Here’s one specific area to concentrate to: Startups often focus on customer acquisition and neglect user retention. They pay through the nose to enroll but invest little to make sure customers stay, resulting in a profitability-killing combination of high CPA (cost per acquisition) and high churn rates.
As at all times, my co-founder tells our clients: “All you need is 100 loyal customers to be a successful full-time business.” We have adopted the same mentality of quality over quantity.
Solving this problem was the cornerstone of our journey to profitability. We have made every effort to grasp exactly when and where our customers leave, and we have put all our effort into resolving their issues to make sure they proceed to make use of our services. This way, you will get more bang for your buck invested in the acquisition.
3. Expand your offer
If you don’t strive for profitability from day one, it will likely take you a very very long time to realize it. In fact, it could also be unimaginable to reorient a company quickly enough. For this reason, it’s sensible to look at additional revenue streams that can support your online business as it gets began. This can be anything from additional services to recent products. For example, my CPG startup allows anyone to begin a side or full-scale business selling supplements, cosmetics, and packaged foods on demand. However, to begin selling, our clients need to establish an online store where they can refer their customers.
Although our customers found our platform easy to make use of, that they had difficulty establishing a store – so we began offering help with this as a separate service. Essentially, we leveraged our existing expertise to supply e-commerce development services, which was key to the runway expansion.