The Profitable Startup

It's really great to see the shift that has been taking place away from unicorns, growth for the sake of growth, and all the chaos that drove throughout. Maybe it's my own personal bias but I feel that these stories of low, slow growth; small teams, small wins but consistency are becoming more norm. While I realize there is still plenty of froth, it's inspiring and makes me hopeful for an industry shift in that direction.

"And when we launched after a year in private beta, almost all of our 100 beta users converted to paid customers." — That's a neat stat and one I'd be extremely proud of.

    Maybe it's my own personal bias but I feel that these stories of low, 
    slow growth; small teams, small wins but consistency are becoming 
    more norm. While I realize there is still plenty of froth, it's 
    inspiring and makes me hopeful for an industry shift in that direction.

This is just called a small business...

The whole point of startups is that you take on massive investment to scale extremely quickly and outrun all potential imitators. It's not the only viable growth model, but that's the whole conceit of startups and what differentiates them for small businesses

It's a bit silly to try to redefine the term b/c you want to self identify as a startup. Just come to terms with that fact you're running a small business

The boot strapped startups I've seen that have had this holier than thou attitude that they are somehow selecting the best engineers by only having a tiny team have always had the absolute worst tech, the worst engineering, the worst leadership and usually also the worst processes that I've ever encountered.

I’m a little suspicious of this because every startup says that they don’t hire the next engineer, they hire the next great engineer.

I think a lot of the value is taking the ordinary engineers (by hacker news) and letting them actually do something. Staying small helps this, because you are not thinking of the business ops burden of not building microservices. You’re building your single dockerized app.

The reason everyone did it was: interest rates.

When interest rates are low the cost of borrowing is low. Now investors can get returns by parking their money so the value proposition has to be stronger for them to invest in the first place, hence companies are now needing to show profitability earlier.

I'm in my third startup. My first one (founded 2013) was acquired by the second one after a year. That one failed around 2018. The first one was a small technology company where my co-founder and I (both techies) made the classical "build it and they'll come" mistake. They didn't come and just as we were running low on savings, we met the CEO of startup #2 who was a classical business founder and had already secured a huge seed round (~3M euro). He had the ideas and the money, we had the tech. So we joined forces. The next few years we tried lots of things and pivoted a few times. But in the end product market fit remained elusive and the 3M was gone.

I went off and did a bit of consulting, freelancing, etc. And five years ago, I helped out a friend who was working on a bootstrapped company that I liked. And we kind of had complementary skills (not repeating my first mistake). It was the beginning of the lockdowns. I had nothing better to do having just come out of a lucrative project that got cancelled because of the lockdowns (and probably because it was doomed anyway). I had built up a bit of reserves over the past two years. My friend had just come out of an intense year of juggling projects for a big consultancy firm. And he had his own startup past. In short, we hit the sweet spot of being old, wise, and experienced enough to maybe pull this off and we weren't looking for pizza money.

An important lesson I learned in my pre-startup corporate career is that making teams smaller makes them go faster. I once had a gridlocked team that wasn't getting anything done. We split the team and immediately things moved faster. Less meetings and debating. And infighting. And stress. More coding. I applied that in startup #2 and while we ultimately failed, I re-affirmed that losing team members can actually accelerate development. The team was down to just 2 people (me and the CEO) by the time we had to pull the plug. But not for a lack of trying. We were crazily productive. We both did the work of 2-3 people and stepped way out of our comfort zones for the last two years of the company.

The lesson I took from the second startup is that investor money makes you lazy and that you don't need it if you can step up and do stuff yourself instead of being lazy and hiring too many people. Money removes urgency and tricks you into not focusing and postponing key work that needs doing, over-staffing, and losing focus. Having stared at having to abandon my third startup because we have been running on fumes continuously for the last five years has kept us laser focused on fixing our huge looming financial problem. For us that meant confronting the elephant in the room: getting customers to understand what it is we are selling. This took us years.

The tech didn't change much (though it got better of course). It flipped around a year ago after lots of failed experiments with getting others to sell our tech. Founder sales is the way to go. It requires founders that can build and that can sell. You need both skills in the team and preferably in all founders.

We've flirted with investors of course. But for about two years they struggled to understand what we are trying to do and in the last few years we proved that we were onto something by generating revenue without them. In an alternate universe we might have gotten invested in but at this point we don't need them and they don't want us for that reason.

Things are genuinely looking like we might hit the hockey stick curve soonish now. We have some very serious leads for multi-million euro deals. We're completely bootstrapped. We did everything with a small and lean team. We're down to three people and it's great. We might start expanding soon. But we're going to be super picky about who gets to join next. We don't want to derail our company with the wrong hire.

It could all still fail. That's the nature of any startup. But we've vastly improved our odds through hard work. I'm more confident than ever it will work out. And yet the reality remains that many startups don't make it. What can I say; I'm an optimist. Pessimists don't build successful companies.

Being profitable is no bad thing - but you can be too profitable, too.

My startup, my cofounder was obsessed with profitability - I was far more focussed on growth. In theory, not a bad balance - but in practice, his drive towards profitability meant that we ended up underinvesting in the business - millions of pounds sat in our coffers that could have gone to hiring, could have gone to maintaining and building upon our core mission rather than focussing on a profitable sideshow - and in the end, while the business still exists, it is now Just Another Agency, rather than the tech startup it once was.

Anyway. These days I run my own affairs, and place emphasis on long term growth and keep short term profits to the absolute minimum needed to live well enough.

It’s good to make a profit - but business should be viewed as any investment should be - let it compound.

Not to denigrate the content of the article or Linear - because it's a fantastic tool - but easy talking about profitability when you're able to spend a year in private beta, focusing on product. This is like talking about creating your own wealth, but not mentioning you have a trust fund.

Sounds like there is a lot of survivorship bias to me. "We were profitable because we did it right, and we don't understand why one would decide not to be profitable".

I think it's important to note that if you're building your business and you are profitable, then you're lucky: you're doing something that you find cool, and it's bringing money.

> What holds you back is rarely team size – it's the clarity of your focus, skill and ability to execute.

This, to me, confirms what I said: nowhere they mention anything like "luck". "Being in the right place at the right time", etc.

The reason startups grow without being profitable is because they "fake it until they make it". They pretend that it's all normal and it will work in order to convince VCs who have no way to know if it's true or not, and don't care (it's just another bet).

Of course a founder won't say "we're not profitable because our company is failing". They will truly believe that they're not profitable because they are on the way to get profitable, through growth. But the numbers are here: most startups fail.

It's always tempting to believe that you succeeded because you are strictly better than the others. And that's the whole point of founding a startup: if it succeeds, the founders want to be rich. The first employees will be "compensated" for their lower salary and extra hours, they won't get rich. The founders have to believe that it's all their doing and that they deserve to get rich and not the other employees, that's an obvious cognitive bias. Otherwise how would they feel about themselves? I don't think it could work.

Having lots of money to throw at moonshot problems is always important. The current breakthrough of the 2020s is LLMs. I wonder if such breakthroughs can be achieved with this kind of approach.

> investors are quite interested in profitable companies that also grow fast.

I'm gonna dispute this. We're currently profitable, and to do so our growth is just "good" (80-100% yoy). We're also raising a smaller amount because we want to return to profitable as soon as possible, and repeat the cycle. Being profitable hasn't been a big selling point in our discussions.

Either our growth is not high enough, or our round is not big enough, as they are so used to seeing ridiculously inflated projections from the last decade.

Furthermore being profitable also removes a lot of leverage from investors. That might make them shy away from a discussion because they know they can't twist out arm as easily.

I agree tho, I wouldn't want to build our company any other way than being profitable. Just saying that being profitable is not something investors seem to like as much as we thought.

> Profitability isn't unambitious; it's controlling your own destiny.

Even better, profitability is all about a harmonious developer-customer relationship. This was alluded to later in the essay, but I believe it is worth emphasizing. The entire point of business is to serve customers. That relationship is everything, and profitability indicates the presence of net-positive impact.

Large teams were a norm because VCs REQUIRED IT, telling things like “we invest in people” and demanding founders to hire rooms full of “the talent”.

This idea makes the rounds on HN quarterly. I think folks reading this need to check their business model. Every company is slightly different and unique to how they are solving a particular problem.

That said, knowing how you get to profitability or what you need to change in your model to get to it are fundamental things to know. But just because Linear did it the way they’ve outlined here, doesn’t mean that is what will work for your model.

48 Comments | 8-months ago

https://news.ycombinator.com/item?id=43130480

I think it's an important thing to remind yourself of sometimes that there's a pretty significant difference between a startup and a small business. In spaces outside HN, small businesses are the default form of business, and there's plenty of merit to running one even in tech - not everything is scaleable, nor does it need to be. If you can identify a niche, generate profits, and provide business value and support the livelihood of your workers, that can be enough. Startups can be very impactful, and the tech sector has thrived as a result of the model, but the growth obsession and leverage is not mandatory.