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It’s no secret that the startup world is hardcore. half of startups They fail by the fifth year and only one in 10 survives in the long term. Recent economic trends are also not very bright.Last year 38% decrease global startup investment and 30% reduction Especially in the US. Additionally, a significant amount of the available funding was gobbled up by trendy artificial intelligence startups. So without AI, the situation may look even more dire.
Today’s founders have to accept the fact that the VC funding round they’ve been working on might not materialize. This has always been the case, but now the bar is so high that a Plan B is essential. How will your business survive if you don’t get funding?
Alternative startup financing is an increasingly popular option, such as taking out a loan with a traditional credit institution. But this does not apply to everyone and definitely not to startups whose income is still low, as the bank needs to see how the loan will be repaid. Additionally, unlike VCs, banks do not operate on conviction, so collateral, or lack thereof, can pre-disqualify software and other startups.
So if no one is willing to fund you and you don’t have the runway to last until the ecosystem recovers again, there’s only one way for a startup to grow: to make money.
Related: Entrepreneur‘s Guide to Building a Successful Business
Why you need to prioritize profitability even when business performance is strong
I’ve been actively raising money for on-demand consumer packaged goods (CPG) startups since our founding three years ago. First, we raised $1.9 million in pre-seed capital to build the core of our business, secure the necessary partnerships, put together our operational infrastructure, develop our software, and grow our team.
With a solid foundation and a proven business model, it was time to scale and we looked for a VC partner to help us scale our business. We expected three to six months of active fundraising, but it turned into a year, which led to the next year, and continues to this day.
Despite clearly strong performance and numerous warm touches and cold pitches, investor reaction was lukewarm. Interest came with conditions and homework. “Once we reach this number, let’s connect again.” But when we did that, the goalposts moved. Fundraising started to feel like a goose chase, and the increasingly turbulent economic environment wasn’t in our favor either.
Competition is fierce today, and startups that would have attracted investors just a few years ago may now never get a second look. With this in mind, a founder should avoid putting all his eggs in his one basket and hedge his bets by approaching growth in a profit-oriented direction.
Because if you don’t, you have two equally unattractive options. Either you go bankrupt, or you’re tied up by opportunistic investors who will pay you pennies on the dollar.
3 things founders must do to increase profits
Four months ago, my startup reached profitability for the first time. It was completed after over a year of active work and planning. Here are the results.
1. Change your mindset
The main job of a startup founder is to raise money. This is something that incubators, accelerators, and other mentorship programs do thoroughly. Therefore, a founder’s focus is often on making the startup beautiful for investors, which means finding ways to increase KPIs even if they are unsustainable, focusing on design over functionality, and growing They end up spending a lot of money on marketing to prove their point.
Don’t forget this when pursuing profitability. Growth is not superficial and for many, it requires a change in mindset. You need to redefine your goals and priorities. Forget about maximizing signups. Focus on paying customers. Forget about vanity metrics. Focus on conversions. Forget about your personal desires. Focus on business needs.
This doesn’t mean you should stop fundraising, but be aware that you’ll probably need to revise your pitch deck.
Related: How to fund your business with venture capital
2. Optimize your business
Changing your mindset is not enough. You have to go deep and optimize, optimize, optimize. For a normal business, there are only so many paths you can take, and if you don’t have a healthy balance sheet, it’s game over.
Here’s one specific area to watch out for. Startups often focus on client acquisition and ignore user retention. They pay for sign-ups but invest little in customer retention, leading to an unprofitable combo of high CPA (cost per acquisition) and high churn rates.
Always as my co-founder tell our clients: “All you need to run a successful full-time business is 100 loyal customers.” We adopted the same mindset and focused on quality over quantity.
Addressing this issue was the basis of our approach to profitability. We go to great lengths to understand specifically when and where our clients cancel, and we do our best to answer their pain points so people can continue using our services. Ta. This way, you can earn more for every dollar you invest in an acquisition.
3. Expand your offerings
Unless you are pursuing profitability from day one, it can take a very long time to achieve profitability. In fact, it may be impossible to quickly change the direction of your business. Therefore, it’s wise to consider additional revenue streams that can support your business while it freshens up. This includes everything from additional services to new products. For example, my boyfriend’s CPG startup allows anyone to start a side hustle or full-fledged business selling on-demand supplements, cosmetics, and processed foods. However, to start selling, you need to set up an online store where you can direct your customers.
While our customers found our platform easy to use, they were having trouble opening a store. So we started supporting this as a separate service. Essentially, we leveraged our existing expertise to provide e-commerce development services. This was important in expanding our runway.