Should startups care about profitability? More news at 10

There are certain topics that even some of the smartest people I talk with, who aren’t startup-oriented, can’t fully grasp. One of those topics is whether profitability matters. It’s common cocktail party chatter to hear people confidently pronounce that some well-known startup is sure to fail.

And then there’s the other one—the one where Snapchat supposedly lost $2 billion in just one quarter. Two billion dollars! 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. (For your information, they actually lost about $175 million in cash that quarter. If you want to know more about this, see the appendix.)

“How could they succeed when they’re not even profitable!”

If you hire six senior sales reps in January at a salary of $120,000 per year, you’ve taken on an additional $60,000 per month in costs. However, these salespeople may not close new business for six months. As a result, your profitability will decrease for two quarters, even though your growth may increase significantly in quarters 3 to 12.

I know this may seem obvious, but I assure you that even smart people tend to forget this when discussing profitability. Employee costs typically account for 70-80% of most startups’ expenses. So, when a company is unprofitable, what you’re actually observing is that they are expanding their workforce ahead of generating sufficient revenue.