The 4 major shifts that a startup needs to make, in order to be successful for the scaling-up journey. Driving Revenue to validate your product/services commercial value is key as a startup, however, as you pivot to scale, its important that you have clarity and validates your profit model. There are 5 reasons why you need plenty of cash to scale and grow, and there are 10 ways to work through for improving your profit and cash. It is not smart to scale an unprofitable business, instead of focusing on driving sales volume, spend time to tweak and land on your profit model.
Articles mentioned in video:
Fred Wilson: "Negative Gross Margins" https://avc.com/2015/10/negative-gross-margins/
Toby Clarence- Smith: "Don't scale an unprofitable business" https://www.toptal.com/finance/interim-cfos/unit-economics
Watch this 3mins video about this shift...
Today, I'm gonna share with you the 4th key shift from startup to scaleup.
Shifting the financial driver from focusing on only Revenue to Profit and cash.
As a startup, having revenue is the commercial validation that you have provided value through your prdt/services.
When you are pivoting to scale, it will be smarter to have the right business model and strategy that will give you profitable growth, because you will need lotsof spare cash for
1) reinvest into growth,
2) reduce dependency on funding through debt and equity
3) create buffers/cushions for your mistakes, because you are human and part of scaling journey is making mistakes in hiring, in your plans & financial estimates, but you will still have to pay for it, so best is you reflect frequently and learn fast.
4) create buffers for unforseen circumstances that are not in your control like competitive moves, regulation changes and natural disasters that has economic impact or causes delays.
5) create buffers for cost of change, when growing faster 30%, you are constantly upgrading internally or leveling up, and Change causes money.
Bill gates says that when he was building MSFT, he makes sure that he had 12 months of cash to sustain operations with no revenues.
As a startup, you are trying to drive revenue to a certain volume to break even.
That's why VC loves it if you have worked out your unit economics model and have clarity on your pathway to profitability.
Fred Wilson says in this blog here: one of the key reasons for the death of high growth, well funded startups is because of the negative gross margins that they did not fix, and ultimately
the borrowed money will become impatient and expect returns, and valuations without liquidity is just paper that you cant eat.
Even Unicorns can become extinct dinosaurs if they dont fix the profit problem. Not convinced, read this other article here.
That's why Revenue is Vanity, profit is Sanity and Cash is King
So, as a Scaleup, you will need to start looking at the business from a profit and cash lens, and tweak or change or improve it with a holistic view towards profitability for your sanity sake.
These are Some ways to look at for improving profit and cash:
Appropriate Tax strategies - pls consult the tax experts accordingly
Optimised Overhead expenses - most smart business owners know how to optimize this with help from a good accountant.
Optimized Operating expenses
Improve Cash flow Cycle and process in terms of timing, frequency, formats & types.
Review Productivity and Efficiencies of key processes
Review Product/Service line Profitability
Review Customer segment profitability
Pricing Strategies & Model
Overall Business Model
Clarity on your Economic Engine or profit model.
One caveat is that you also need to have clarity on the key activities, process, resources and assets that are creating your differentiation or proposition and
then make sure that they are untouchables, because you want to avoid killing the goose
that laid the golden egg unknowingly when you are on a cost cutting spree towards profitability.
So, are you working on your profit model or are you scaling into never never land?