The Importance of Profit for Startups

Written by Ed Johnson

31 December 2023

Perhaps it’s because I had previously burnt through all the cash we had. Perhaps the realisation that we had spent £100,000 and ended up with a business that was barely able to survive, has made me a better entrepreneur. When we started and then fundraised for PushFar, we did so with a clear focus on strong, stable growth. We did so with a huge emphasis on spending as little as we could.

The first business I co-founded, in which we raised investment, was a business called the Omyx Club. We raised just shy of £100,000 and in the lead-up to the investment we had what I thought was a clear business plan, a strong market proposition and, with the investment, more than ample cash in the bank. When I look back, I realise that we did. All of this was true. The trouble was, as with a lot of startups and young founders, any amount of money can be burnt extremely quickly – and it was! I was 23 at the time and whilst I had experience in digital marketing, web development and online business growth, I didn’t know how to manage a start-up bank balance or plan for the future. We “invested” in a PR agency for our launch, we spent money on consultancy advice and event managers, in-person events and quickly became distracted from the main purpose of a business. It was all rather a disaster. Within three months from our launch, we’d burnt through most of the cash, hadn’t looked at what people wanted closely enough, pivoted and pivoted again but too late and in the wrong directions and began to fail fast.

I am grateful for that failure, in many ways. It taught me so much that I was able to apply to PushFar in cash generation, budgeting and prioritisation. It is one of the reasons I believe PushFar became such a success. Yet, I see so many other businesses making these same mistakes that I made and not enough seems to be done to discourage them. In some cases, in fact, it seems that there is a promotion of cash burn. Spend fast. Die or fly. Particularly where fundraising comes into play.

The main purpose, in my opinion, of a business, is to make money. Period. And, again, in my opinion, the most sensible, least stressful, least distracting and best way to do this is through revenue generation and stable growth, reaching profitability as quickly as possible. That, at least, should be the best option for a huge number of start-up founders and entrepreneurs. Profitability is king.

The magic of profitability is that you, in theory, will never need to fundraise again. Of course, I fully accept there are exceptions to the rule. Fundraising can enable faster growth and expansion of propositions, to name but a couple of reasons to further fundraise. However, there are so many entrepreneurs and start-up founders who see fundraising as a necessity with no consideration to the alternative options available. They raise investment in order to get to their next funding round. Pre-Seed, Seed, Pre-Series A, Series A, Series A+, and so on and so forth. The roundabout, which is extremely hard to start, harder to get to the next level and most importantly, very tricky to get off. With every funding round, the founders’ equity is diluted, the chances of making back the money raised is even further away and unless you are 100X’ing your return, institutional investors will push you to spend more, hire more colleagues and go faster until you burnout, the cash runs out or, in a very few instances, there’s a “unicorn”.

Now, if you’re lucky enough to have a “unicorn” (a business with a valuation of £1bn+) you are one of the few, not the many. It doesn’t mean it shouldn’t be an aspiration, but the word of caution I’d share is that I have seen and spoken to many founders who regret diluting equity more than they ‘needed to’ by taking on private equity investments and tying themselves into a business for far longer than as a result, before exiting or seeing the rewards of the journey.

So, please, for any start-up entrepreneurs out there who are thinking about fundraising in order to start or grow your business, ask yourself how much you really, truly need, in order to start your business. And then, ask yourself whether you really need to raise more and get to the next funding round. As a founder, see how far you can get without any investment, first and foremost. If you’re generating revenue, focus on growing that revenue, keeping expenditure down to an absolute minimum. Count and track every single expenditure or subscription and ask yourself if what you’re spending money on is helping feed the vanity of the business or genuinely fuelling revenue growth. Focus on getting to profitability and growing from there, as quickly as you can. Nine times out of ten, it will be the best way to grow your business