As VC investors tighten their purse strings, your business can still be successful.
5 min read
Opinions expressed by Entrepreneur contributors are their own.
Just a few days ago, I was on the phone with a friend and fellow founder who runs a direct-to-consumer marketing platform and had spent quite aggressively on user acquisition over the past year. Casually, I suggested that he should work with a former colleague of mine who was a whiz at growth marketing and could probably lower his Customer Acquisition Cost (CAC) by more than 25 percent. He didn’t hesitate for a moment before replying: “I don’t want to spend it. We need to focus on profitability — our core product — not growth.”
“What do you mean? You have over two years of runway,” I said. “Surely, you can afford some marketing and experimentation.”
“No,” he replied. “We’re really drilling down on our core product, value proposition and realizing our unit economics to profitability. We are cutting everything not absolutely and fundamentally core.”
He’s not alone in this opinion. Over the past few months, a different tune has started to play in Silicon Valley and, I’m afraid, in tech hubs around the world. As WeWork’s IPO failure and the financial inflation scandal at OYO translated to more than $2 billion in losses for Softbank, other cracks are starting to show in the “grow at all costs” or “use capital as a weapon” mentality promulgated over the past decade. Post-IPO, Uber and Lyft are losing billions and remain unprofitable with seemingly no end in sight. Casper’s IPO failed, and others that didn’t — like Peloton‘s — were lackluster at best.
As venture capitalists pull back, this has necessitated that founders be more conservative and focus on profitability so as not to risk going under, which usually means cutting their company’s core product offering and scaling back all other expensive research or differential product lines. Further, founders need to cut expenses wherever they can and ensure a proper accounting of all associated business costs.
Focus on the Core Product
Let’s go back to my conversation from a few days ago. The founder I was speaking to repeatedly mentioned the need to focus on the core product and core value proposition and not engage in more speculative or experimental projects. In this focus on profitability, what was he specifically referring to?
As a startup matures beyond its initial product, the founding team takes on new projects, research opportunities and speculative, money-losing business lines in order to further propel growth. By nature, entrepreneurs and founders are curious and want to explore different opportunities to grow their business. In fact, they would often rather disrupt themselves than see someone else do it. And yet, when focusing on profitability, founders may want to significantly cut or shut down money-losing experimental research projects and even non-core business lines that don’t meet the focus of the company.
But how, as a founder, do you decide what’s core and what isn’t? For instance, a new research project may be the next generation of your core product offering but still be many years away. How do you decide what to cut and what not?
The simple way is to ask yourself: Does it relate back to your Minimum Viable Product (MVP)? The MVP is the simplest and most basic product to serve the core value needs of your target customer base. When analyzing what is core and what isn’t, refer back to your MVP and make a determination as to what research projects or even entire business lines are essential.
Once you determine which projects and business lines are not essential, conduct a thorough analysis and accounting of whether scaling back such projects will be beneficial to profitability in the immediate term. Often, these types of strategic changes can have a significant benefit and impact.
Cut Expenses and Focus on Accountability
In a world awash in venture capital, it can be easy to lose track of your expenses and accounts. Just a few years ago, I was often losing potential hires to other well-funded startups offering benefits like yoga classes, free meals and other sometimes bizarre benefits.
As those times are now seemingly coming to a close, founders need to be proactive. First, they should strive to cut all non-core expenses and miscellaneous expenses from their companies. This includes addressing such matters as office space, benefit programs, charge accounts, travel and other miscellaneous expenses that add up.
You have to be careful here though. Maintaining a company’s culture is a paramount consideration. If you do choose to cut certain perks or benefits, explain why to colleagues, focus alternative incentives and seek to retain a selection of benefits they prize the most.
Additionally, one of the most effective ways of controlling costs is getting an accurate picture of your accounting records. According to Indinero, many founders fail to grasp the critical importance of accounting early on and end up paying dearly as their companies mature. The easiest way to solve this is to hire a part-time Chief Financial Officer, or if that proves too expensive, hire a remote service like AccountingDepartment.com, which provides more flexible rates.
Accelerate Your Profitability
As venture investors pull back from financing early stage companies, founders are increasingly focusing on profitability as a means to ensure their long term success. Namely, founders can scale down non-core business functions and research projects in a bid to save money and become more profitable. Additionally, they can cut non-essential benefits and expenses and while engaging in thorough accounting and records auditing. The choice is yours.