WeWork’s IPO failed because the investors were not convinced of Wework’s road to profitability.
The hard truth of running a startup is: 9 out of 10 of these will fail. If you want to be the successful 1, chances are you need a credible path-to-profitability. Many founders have mentioned the key reason for failure is ‘running out of cash.’ After all, the investors won’t fund your next round unless they can see a return on their investment, which is driven by your path to profitability.
So, every startup needs a well defined and convincing path to profitability. Your path to profitability decides if you can get funding or not.
Yes, I know, “All paths lead somewhere.”
But when it comes to business, the only path that matters is the road to profitability.
Like all paths, the path to profitability is strewn with losses, sporadic cash flows and huge customer acquisition cost.
That’s the reason why the path to profitability is just more than money. It’s the essence of business operations and leadership skills. Path to profitability is being aware of internal and external factors potentially impacting the business:
The Internal Aspect
First – The idea itself is the key to your path to profitability. Is this something the market needs? Will someone pay for your service? Can you protect this idea or intellectual property so the competitors don’t simply flood the market with a similar product? And, are you the disruptor in your domain? Consider all this to understand whether your idea itself is profitable.
Another important internal aspect of the path to profitability is your team. An entrepreneur may have the best ideas. And he/she can’t execute the idea alone. It’s the quality of the team that decides the success in execution. So team-building plays a crucial role in the success of path to profitability.
Oh, and the team is not necessarily just a collective of domain experts, but also a collective sharing a common dream. The team members are invested emotionally to succeed and thus are driven beyond profits.
The External Aspect
The important external aspect of profitability is your paying customers. How many customers do you capture initially, how many do you retain, and how many new ones do you win – these numbers are important. Ultimately it’s the quality of value transmission that determines the ease in the acquisition and retaining the customer.
You may also want to look at whether your idea has a local reach or global reach. Are you catering to a specific domain (say, a student accommodation in New York) or you are looking at a global (room-booking) service?
Define your path to profitability by having multiple strategies to identify, evaluate and strategise monetisation.
Path to profitability is not just choosing between revenue growth and profitability but integrating both in a most robust model to drive business sustainability.
Pitching your path to profitability
It is critical that you define a clear path to profitability in your business plan or pitch. Remember: your path to profitability determines your profitability quantum, which in turn will decide returns to the investors. So, always clearly show how and when you will turn into a profitable business, and how you will maintain your competitive edge. To give a smooth ride to investors, smoothen and keep attractive the path to profitability.