Should You Be Profitable?

The Startup Help Desk

In this episode we answer questions about making money and profitability! We answer questions including:

• Should I focus on Growth or Profitability?
• How do I figure out my Unit Economics?
• How do I know if I'm making enough money?

All of these questions were submitted by listeners just like you. You can submit questions for us to answer on our website https://www.thestartuphelpdesk.com/ or on Twitter @thestartuphd - we'd love to hear from you!
Episode Notes
Reminder: this is not legal advice or investment advice.
Q1: Should I focus on Growth or Profitability?
Most should prioritize profitability. This has not always been the case, especially as investors have encouraged venture-backed founders to prioritize growth for years. However, the macro climate has changed, and profitability is always in season.

• Profitability makes it possible to pursue your ambitious growth goals.
• That being said, if you have plenty of cash on-hand, then prioritize growth.
• 10% month-over-month growth is exciting.
• Growth expectations are lower when you are profitable.

Q2: How do I figure out my Unit Economics?
Unit economics answer this question: are you making money or losing money on every unit of your product that you sell? Common factors for your unit economics include:

• CAC (Customer Acquisition Cost): the cost to acquire a customer.
• LTV (Lifetime Value of a customer): the estimated revenue you will generate over the lifetime of a customer.
• The length of your sales cycle.
• Customer retention.

The aforementioned methods can be effective to helping you determine how much money you make (or lose) with every product you sell.
Another way to think about unit economics is to start with the margins you need for your startup (Ash implores founders to aim for 90%+ margins), and price your product accordingly. Thus, the revenue you generate per customer should be roughly 10x the corresponding costs you incur to acquire, service, and retain that customer.

When do unit economics matter? They matter when you are turning on your startup's growth engine.
Q3: How do I know if I'm making enough money?
The answer to "am I making enough money with my startup" is different for every founder. Are you comfortable, motivated, or over-stressed with your startup? Are you venture-backed? Or are you profitable and bootstrapped? The answers to these questions will factor into your own equation for what "enough money" means to you.
Other factors to include in your equation are:

• If you are venture-backed, then there are growth and revenue milestones that will influence your ability to raise the next round of funding.
• If you are not profitable, then how much runway do you have?
• If you are profitable, then how much capital reserves do you have?

As your startup grows, "enough money" may take on a new form at every stage. Are you making enough money to help your company reach the next milestone. Once you reach that next milestone, you will likely need to recalculate what "enough money" means and continue your pursuit for it.