Relentlessly Profitable- how the opportunity cost of a great idea destroys startups

It’s really amazing how many startups fail. Not that ideas fail, no, that’s a given- we only first began generating scalable revenue on our third - but that as the costs of running a business plunge ever lower so many smart people can’t cover their $4,000/month “don’t die” costs.

Part of it’s location, for sure. If you live in San Francisco there’s just some base costs that keep your base costs relatively high. Same with New York, or London- all the places with money, basically. If a place is a haven for raising venture capital, it’s probably a terrible place to become profitable, if only because the necessity of so many rich people in one area drives up the cost of living.

Part of it’s just giving up- talking to people who have their startups die and who go off to do the employee thing, it’s usually because things aren’t moving forward as fast as was hoped for, or the team isn’t working out. The latter is especially nasty, because you can’t really recover from it. Starting a business from scratch means working really long hours with the same people every day- if you don’t get along with someone you’re working with 12 hours a day, chances are things are going to unravel in a hurry.

But in a large part, I think great ideas kill new companies.

When you have a great idea you aren’t focused on making money, you’re focused on changing the world and creating this amazing thing. And, in the early days, the only thing that matters is cashflow. That this isn’t highlighted at the top of every startup postmortem is pretty surprising- cashflow, cashflow, cashflow! If you’re losing more money than you’re making, your company is dying. If revenue is going down, you’re dying. If revenue is going sideways, you’re dying.

Perhaps more importantly, if things aren’t going up, they are going down, because new companies are precarious buggers- gravity pulls towards death, and you’ve got to blast off in a goddamn rocket ship to escape that pull. Guess what the fuel for that blasting off is? Yup. Cash- and not just any cash, but cash on hand. We’ve had a fun time with that one over the past month, making the transition from startup losing money and slowly dying to company making money and growing revenue.

A lot of great companies start by building something totally unrelated to what turns out to be their core business. Microsoft started with Basic, the earliest venture of Jobs and Wozniak was selling phone phreaking blue boxes, HP started with esoteric scientific instruments, Intel began making SRAM chips. The things that made them famous, Windows, the Apple II, pocket calculators, CPUs, those all were funded with cash. They didn’t start with brilliant ideas to change the world, that was Step Two.

Step One was making money.