How important is profitability in a startup?

Every day another high profile founder like the creator of Ruby on Rails (DHH) writes an anti-disrupt-o-mania article.

Anti-unicorns. Should we feel pleasure when seeing Gilt join the unicorpses?

Instead, we are advised to create profitable startups that are self-reliant. Forget the VCs and investors and do it on your own terms. Be in control of your own destiny. 100% of $50 million is a lot better than 5% of $1 billion.

Not according to Matt Galligan, co-founder of Circa, who bemoans their founder-only board in this episode of This Week in Startups (~minute 55). It turns out that when things go south, an experienced board that can make the tough decisions is tremendously important.

Moreover, having a profitable startup means you have money that you could have spent on growth, customers, or product. But instead you kept it for a rainy day. Do you think your competitor made the same decision? (doubtful) They probably raised another round.

So which way should we go?

1. If you are growing faster than your peers, raise all the money you can. Give up some control, delay profitability, and go for >10X and take over the market.
2. If you are growing slower than your peers, go back to product. Turn down the VCs, and open that Ramen noodle 12-pack. Stretch that “profitability” for as long as it takes to grow faster than your peers.

Why is growth so important?

Growth is the currency of startups. Revenue, page views, retention, not even profit is as important as growth.

Why? Because we don’t sell Campbell Soup. We don’t sell Viagra. We sell a pseudo-unique software product with no patent protection. Anyone can (and will) replicate it immediately. So the only reason our companies are still alive is that we’ve managed to stay a few steps ahead of the others. (network effects, unique data, timing, etc)

Since much of the world around us does not function by the same rules, we tend to get overconfident. We think we’ve achieved immortality in the 10 million users, in $10 million in revenue, in 10% market penetration, in 50% EBITDA.

Instead, we should invest everything back in growth. Our time, our profits, our equity, and VCs (at the right time as mentioned in #1 above). Most unicorn investments are justified and I would challenge any of you to pass on the Series A of any of the current unicorns. You show me a SaaS startup with over $1M ARR growing >20% MoM, and I’ll invest in it no matter what their profit is.