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How Quickly Should Your Startup Business Become Profitable?

Starting a new venture – whether a company, venture or project – is exciting, motivating and energising.

It can also be a very challenging process, particularly if you are taking on significant responsibilities for the first time. One of the most daunting elements of starting a new initiative is the process of stepping into the unknown.

A question that will be particularly relevant for those who are starting businesses and have secured funding from stakeholders (or forfeited their salary in order to get the company up and running) is “how quickly should your startup business become profitable?”

Written By
Dan Partridge

This question is shaped by a number of factors. There is the pressure to succeed, and profitability is often regarded as the primary marker of success. There is the pressure to repay investors who have taken a gamble on your venture and are looking for significant, early returns on their investment. There is the pressure to expand, allowing further investment in salaries, premises and research.

It is important to notice, however, that these pressures all presuppose that the primary goal of an initiative is to generate an immediate profit. The awkward truth is that sometimes immediate profitability works against long-term objectives.

In his HBR article “No Innovation is Immediately Profitable” Scott Anthony makes this abundantly clear. Using the example of a sub-committee within a corporation, he explores the premise that market pressures can actually stifle innovation:

“Every company should dedicate a portion of its innovation portfolio to the creation of new growth through disruptive innovation. But companies need to think carefully about who makes the decisions about managing the investment in those businesses. If the people controlling the purse can’t afford to lose a bit in the short term, then you simply can’t ask them to invest in anything but close-to-the-core opportunities that promise immediate (albeit more modest) returns.”

This is keenly felt in the technology industry, where innovation is by its very nature disruptive. New technologies challenge the status quo, particularly where the status quo is widely adopted and extremely profitable. This is exactly how companies like Google have generated such remarkable wealth. Not only did they resist the temptation to pursue early profitability; they positively avoided it!

Whilst the world of angel investors and VC funding makes this possible, most of us aren’t in a position to carry a long-term deficit in order to let innovation flourish. The challenge, then, is to ensure that profitability isn’t the only measure of health/success. Our experiences as a startup were that innovation came before significant profitability, and that this has been very beneficial for our long-term health as a company.

Profitability, Website Design and ROI

This is clearly a very helpful principle to apply to website design. The premise, of course, is that investing in your website can involve significant early expenditure – particularly if you’re a startup or working with a limited budget – which can lead to pressure to become profitable.

An effective website is a very powerful tool that will help you to communicate more effectively with your audience and generate a huge ROI. It might not, however, be immediate, particularly if your innovation requires you to win the trust of uncertain customers before starting to generate serious revenue.

There are two obvious ways to approach the question of profitability and ROI when considering investment in your website, digital marketing and web presence. The first is thinking about scalability, investing initially in a simple brochure-type site that introduces your ideas and implements a simple conversion goal (perhaps encouraging interested parties to sign up to your newsletter or buy your first product).

The second would be to agree a broader evaluation of ROI to extend beyond profitability and include factors such as engaged audience, web traffic, brand strength, social media reach and the extent to which you have helped people to understand the goal of your innovation.

How quickly should your startup business become profitable? We’d suggest that by implementing the “no innovation is immediately profitable” principle you should be able to map out a conservative timeline that honours your investors but gives you room to remain creative.

Image: Facebook Business by Sean MacEntee on Flickr (Creative Commons)

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