How To Run A Lean, Mean Profitability Machine
For anyone who dreams of starting their own business, the fact that 50 percent of new ventures fail in the first few years is a daunting thought.
Of course, no one starts out expecting to be one of the many that don’t make it, but the reality is too many aspiring entrepreneurs have lofty expectations of gleaming Silicon Valley office space, worldwide recognition and a product that changes the world.
But, the truth is that launching and running a successful, profitable enterprise takes more than just big dreams and a great idea. It requires careful planning, realistic expectations, strategic thinking and a willingness to buck the status quo when it comes to what a “conventional” business model looks like.
With nearly a quarter-century having passed since the dot-com bubble began, modern history has certainly given us plenty of lessons from which we can learn. And, it turns out, the secret to real, long-term success is to take a calculated, responsible approach that prioritizes customers needs, real solutions and smart investment over glitz, glam and unicorn status.
Here are 7 tips for running a lean, mean profitability machine that will beat the odds:
- Pass on the fancy HQ. Let’s face it: the cost of office space is outrageous. In San Francisco, rent in the central business district hit a record high this year at $81.25 per square foot, beating the previous record of $80.16 set at the end of the tech boom. And that’s cheap. The cost tops $255 in Chicago and a whopping $486 in trendy Austin, Texas. That means you could be spending tens of thousands a month for a shoe-box sized space. Instead, forgo the high cost of a spacious, luxurious HQ. Frankly, none of your customers care what your office looks like—only that your product solves their problem. All they need is an address to which they can send payment, and the more you pay for that location, the more it eats into profitability.
Eliminating office space as a budget line item also lets you cross off most of the associated costs: furniture, utilities, cleaning services, etc., saving you even more in incidental expenses.
- Embrace remote work. Thanks to modern technology, there’s no reason to force all of your employees to congregate in the same building anyway. Overwhelming evidence points to the fact that remote workers are more productive, happier and healthier. Not only does this avoid office overhead, but it also allows you to tap into a wider talent pool, hiring the best, brightest and most motivated employees wherever they are with zero relocation challenge. Plus, this puts your team out in the field, closer to your customers, where they belong.
- Keep the organization flat. Hire for talent, initiative and drive, rather than wasting money and energy recruiting for managerial roles. There’s no reason to build a hierarchical org chart with multiple layers of bureaucracy when one person can get the job done. Instead, create a nimble team that’s willing and able to work across various projects and departments, to be agile and collaborate to solve problems and surface solutions.
- Invest in R&D instead of sales. Building the most effective product should be your primary focus. But, according to the Startup Genome Project, up to 70 percent of startups scale up too early, adding sales and customer service capacity before they have the customer demand to support it. As a result, most fail because they invest based on forecasted growth: if two reps can generate $10M in sales, adding six more reps should quadruple sales, right? But, it’s not that simple. Investing in sales capacity also requires investing in admin assistance, operating expenses and, of course, personnel benefits. And, even the best sales team can’t sell a mediocre product. Instead, invest in the R&D it takes to build the must-have solution your customers can’t live without. Make it ironclad dependable, an exceptional value and something they’ll want to tell their colleagues about. Referrals are far more valuable and much less expensive than a high-priced sales bench.
- Focus on customer needs. Solving a critical problem for your customer is your number one priority. Yet, 42 percent of startups fail because they didn’t solve a market need. Having a brilliant idea is never enough—it has to be something they actually need. Don’t waste time on bloated, nice-to-have features. Get involved with your customers, learn their business, know their processes, challenges and competitors, and build solutions that serve their needs.
- Say no to big money. For some startups, VC investment is a primary goal. And in the era of mega-rounds and unicorns, it’s easy to see how chasing the big money becomes alluring. But, excess funding begets debt, and even big companies like Jawbone and the solar-power startup Solyndra, which raked in hundreds of millions in investment each, couldn’t be saved from “death by overfunding.” With big investment comes big pressure to grow in lieu of profitability, not to mention loss of control at the hands of overzealous investors. Instead, focus on generating income and invest those profits to fuel product-centric expansion. If you opt to accept funding, go for small rounds to avoid dilution and too much liquidity.
- Divest when it makes sense. Selling off a product or business unit is sometimes perceived as a signal of distress, but in fact, it can be an extremely smart move, allowing you to devote more resources to a core offering or new opportunities. If it becomes clear that your current portfolio isn’t well suited for growth plans, finding a buyer with better resources can be the best thing to happen to a product that perhaps you’ve outgrown.
An oversized sales team and luxurious office space are among the poor investments made by the 75 percent of venture-backed startups that fail in the U.S. Wasting money on real estate, overhead, building bloated products and chasing funding can create huge roadblocks to profitability. Following a more unconventional path—one marked by prudence, common sense, fiscal responsibility and strategic decision-making with an eye for the long haul—is a much smarter approach that will keep your company profitable and able to beat the odds.
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