Startup profit

An entrepreneur wrote to me: “I started a company few years ago and make enough money for myself. I do not see the reason to grow the business bigger as you advocate in your blog. I think it should be up to entrepreneurs to determine when to start and when to stop and how much they want to grow the company. What do you think?

Answer: Starting a technology company is different from starting a small business. If you are a true entrepreneur then your focus should be to grow the company to the maximum profitable possible. You do not start a company for fun; you do not start a company just to make the same as someone who works for a company; you do not start a company because you need a job.

Business theories mentioned about profit but they do NOT say how much is considered good profit. Business school only teaches you to make money and not losing money. If your revenue is $100 and your cost is $99 then your profit is $1. Is it good enough? The best way to determine a company is successful or not is looking at the profit margin. A successful company must make a profit margin between 20 to 30 percent. As startup, it would take a period of time to reach that level. Of course some can do faster than others but on the average it may take about 2 years. If you do not get that profit margin then you must ask some serious questions about the nature of your business and the way it is being managed.

There are many people who run businesses that do not make a profit. What they do is make just enough money to keep themselves financially afloat rather than concentrate on building and growing the business. They think that they are in technology business but in fact they are really in small business, no difference from someone who operates a coffee shop or a restaurant. As an entrepreneur in technology, you are in a highly profitable business. If you do not make at least 20 to 30 percent profits then you are NOT successful.

Please look at Apple, Google, and Microsoft; even they are no longer startups but they do not stand still although they are making good profit. They know that if they do not grow, someone will bypass them and capture the market. Technology is a highly competitive business; if you do not grow fast you will be left behind. If you are not highly profitable, you cannot grow fast so you need that big profit margin to grow into an enterprise so others cannot compete with you. What will happen if Apple does not have iPod, iPhone and iPads? Is it possible to stay just in personal computer business today? Do you know what happened to Dell? Dell was the number one computer few years ago but today Dell is struggled to stay in business. Do you know what happened to Nokia? There are many examples of technology company that do not move fast enough. There is a big difference between operating a successful technology business and having a hobby and it is important to differentiate between the two.

Sources

  • Blogs of Prof. John Vu, Carnegie Mellon University

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