It goes without saying that a company that loses money has a limited lifespan.

Consider a typical startup with around 50 employees, mostly engineers and product people. The company hasn’t yet generated any sales revenue but has just raised $10 million from investors. With a burn rate of approximately $1 million per month, simple math tells us they have about 10 months before they can no longer cover their expenses.

Since raising another $10 million takes at least six months, management will need to begin the next fundraising round almost immediately after closing the previous one.

Which raises an obvious question, who has time to focus on customers when all attention is on raising money?

The answer is, no one. Companies that prioritize fundraising at the expense of their customer relationships will ultimately fail, and usually faster than they expect.

What is Profitability?

In this context, profitability means positive cash flow. Simply put, a company is profitable when it earns more from customers than it spends on salaries, rent, cloud services, marketing, and other expenses. Any surplus should be reinvested to fuel future growth and market expansion.

It’s important to recognize the close connection between money and time. When a company isn’t profitable, its cash reserves and burn rate determine exactly how much time it has left to crack the formula.

A company losing $10,000 a month has a fixed lifespan. Divide the money in the bank by 10,000 and you have the exact number of months it has left before it needs to become profitable or raise more capital. The word “burn” in burn rate should give you a sense of how management ought to feel if that formula remains unsolved.

The most famous recent example of a company that never cracked it is WeWork. Founded in 2010 by Adam Neumann, WeWork raised a cumulative $12.8 billion by September 2019, when it attempted to go public on the New York Stock Exchange at a valuation of $57 billion. The IPO required the company to publish its financial statements, and potential investors quickly saw that it was burning cash at a staggering rate. The IPO was pulled, Neumann was pushed out, and WeWork’s valuation collapsed to below $10 billion, less than the total amount raised.

The lesson is that no business plan survives its first encounter with reality. For WeWork, that encounter revealed a business model that simply couldn’t support its spending, and the decisions of its leadership led to a dramatic restructuring.

Maximizing Revenue

A company’s revenue depends first and foremost on its ability to reach potential customers and persuade them to buy. This, of course, is the central challenge for any business.

To overcome it, management needs a deep understanding of who potential customers are, how to reach them, how to make marketing effective, how to explain what the product does, how to justify the price, and how to stand out from competitors. Unfortunately, there are no shortcuts. Answering these questions requires lengthy processes of trial and error.

It’s also a mistake to assume that a product you’ve worked hard to build will immediately attract the customers you need to turn a profit. In most cases, no prospective customer is actively looking for a solution to a problem they may not even know they have.

And even when a company makes something everyone needs, it still has to reach its target audience. The best real-world example of this is the pharmaceutical industry. There’s no question whether a sick person wants a cure. They don’t need to be “sold” on the idea of feeling better. In theory, the patient seeks treatment and the doctor prescribes the best available medication.

In practice, however, 19% of pharmaceutical company spending goes toward advertising and marketing. The ten largest US drug companies invested $47 billion in marketing in 2019 alone, which explains why it’s nearly impossible to watch television in the US without being bombarded by drug commercials.

The takeaway is clear, even when a product is genuinely necessary, companies still need to invest in marketing. Solving a real problem doesn’t automatically translate into sales.

Product-Market Fit

Building a profitable company is a long process of dialogue with the market. This conversation helps a company find its foothold in the segment of customers who are genuinely willing to buy its product or solution, and it profoundly shapes how the product is defined and tailored to customer needs.

Understanding product-market fit focuses a company on the handful of essential features that actually motivate customers to buy. A smaller, more focused product takes less time to develop and costs less to build.

Think for a moment about the vast capabilities of Microsoft Word beyond basic word processing, and the small fraction of those features you actually use. For you, everything else was a waste of development resources. But for other customers, those features are essential, and Microsoft wouldn’t have built them without a deep understanding of what different customers needed from their software.

Final Thoughts

The old cliché holds true: time is money. And since trial and error takes both, a company striving for profitability should live by two hard and fast rules.

Start marketing efforts on day one. And spend as little as possible until you see results (meaning positive cash flow from customers).

Profitable companies also understand the needs of their target market and keep their products lean and focused, giving them the best chance of reaching the largest possible pool of customers.

In an upcoming article, we’ll explore effective and affordable ways to build a dialogue with your target market.