Should startups care about profitability?

There are certain topics that even some of the smartest people I talk with who aren’t startup oriented can’t fully grok. One of them is whether profitability matters. It’s common cocktail party chatter to hear people confidently pronounce that some well-known startup is sure to blow up. Or you know the other one   the one where Snapchat lost $2 billion in just one quarter. Two billion! what a disaster! Except that they didn’t actually lose $2 billion in cash. It was a stock option incentive related “expense” but I bet you didn’t know that because in an era where we only read the headlines — they must be a train wreck losing billions. (They actually lost about $175 million in cash in that quarter, FWIW. See appendix if you want to know more on this.)

“HOW COULD THEY SUCCEED WHEN THEY’RE NOT EVEN PROFITABLE!”

If you hire 6 senior sales reps in January at a $120,000 / year salary then you’ve taken on an extra $60,000 per month in costs yet these salespeople might not close new business for 6 months. Your profitability will go down for 2 quarters while your growth may increase dramatically in quarters 3–12. I know this seems obvious but I promise you that even smart people forget this when talking about profitability. 70–80% of the costs of most startups are employee costs so what you’re really talking about when a company is unprofitable is that they are growing their staff ahead of their revenue.