Questions

Every interview with an entrepreneur goes the same. They say there is no money made the first year. What goes on this first year?

3answers

Well, I made money in the first year...in the first couple months, actually. I run a consulting business.

The other guys...let's get some definitions going here. They made revenue. Unless they were totally hopeless, they had some cash coming in. But they also had expenses going out.

Manufacturers and IT guys who go into business generally don't know anything about selling. They get an "idea" and go create something, and then have to struggle to get it adopted. So they have to throw a lot of cash out, and then try to rake some back in. This is the wrong order; however, that's what most people do.

That is what their first year is spent doing. Developing the idea, and then finding a market to sell it to. If they fail to accomplish these two steps, they won't last much longer.

Until revenue exceeds expenses, they won't make money.

They're also developing systems and processes, and getting experience. They could be growing, in which case they are probably adding people at a high rate which consumes profits as soon as they come in to pay for the new staff. Fast growth can also easily be mismanaged and cause a succeeding business to crash and burn.


Answered 7 years ago

When I took over Springleap, we made money from month 1 and that has never changed.

Let's rather start with this:

Revenue vs profits vs Runway. They're all different.

As a startup you figure out your costs for 18 months and that's your runway. That's what you raise. Thereafter, show how you're going to make capital.

Fact is: some startups don't "make" (turn a profit) in the first year. That's why the valuations are significantly lower. It's not the lack of revenue... it the lack of evidence of market fit. It's the data that's missing which makes the investment super risky. Getting market fit, adoption and validation is always best shown in scalable predictable revenue.

So what goes on in this first year?

Assuming you're not dealing with freemium or community models that are "build it, get them through the doors, get the engaged and then figure it out" - you need to figure out the path to revenue, average lifetime value of a customer and cost of acquiring a customer.

First 2-3 months should be MVP. Thereafter a month or 2 of finding the market fit data. Then agile redevelopment based on A/B testing and surveys. By this point you're 6 months in. The next 6 months are all about poking and prodding to find the scalable model. As my VC pal Eliot from Boldstart says: Build, validate, scale.

Investors classical want to get involved in the scale part unless it's your F&F round, where they're betting on the jockey.

We actually got Springleap profitable in month 2 and 3 - I think Lane Becker would agree that serendipity always plays a part, but heck, we worked super hard and were relentless.

We used a variety of techniques. One of the most effective: get clients to pay for us to develop the things they wanted that made sense to dev for the platform. It's a great tactic: go in. Listen to their searing pains, gaping holes and primary goals.

If your product/ service can service these, offer the dev at barebone costs and put a margin on top for the service itself. Show a huge discount and that you're doing something special for them that you were only planning on doing much later.

Nail this technique and you will get:

1. Case Studies
2. Revenue
3. Testimonials
4. Referals
5. Data
6. Product

Hope this helps. Live long, prosper and build stuff people will use. Drop me a call if you want to pick my brain apart on the matter.


Answered 7 years ago

Well, I don't think I have ever not made money in the first year. In fact, I generally make money in the first one to two weeks.

But, I guess what they mean is that entrepreneurs generally reinvest as much money as possible into expanding their businesses in the first year. To be honest, I think this continues well into the 3rd or 4th year.

The speed of profitability is really going to be dependant on the industry and competitive environment you find yourself in.


Answered 7 years ago

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