One of the most fascinating decisions to make in running any start-up is deciding when is the right time to start making a profit. The irony is that Untemplater is much more profitable than a website like BusinessInsider.com founded by Henry Blodget, not because Untemplater makes so much money, but because Business Insider, despite it’s large following of readers, is still loss making after all these years.
Since Business Insider has millions of visitors a month, it is worth much more if sold than Untemplater with tens of thousands of visitors a month. Funny how things work right? You might think the name of the game is to just grab the most market share as possible, and you’d be right in a bubble market like we are in right now. We start measuring the value of companies by “eyeballs,” user time spent, active concurrent users and so forth even though a company is severely loss making. What happened when the dot-com bubble burst? Poof! All those billion dollar valuation companies disappeared.
The end game has to be profitability. Otherwise, you are just playing the greater fool theory. Let’s see what Jun Loayza from RewardMe has to say in part two of our interview. If you missed part one, check it out here.
UNDERSTANDING RETURN METRICS
Sam: How important is profitability in a startup company? Compare profitability to growth and users. Is a large reason why startups fail due to the overhead costs, namely salary? Couldn’t a startup company exist forever if the founders never paid themselves anything?
Jun: It depends on the stage of the startup. If it’s an early stage startup that is looking for market validation, then user growth or client growth of any form is critical. It also depends on the type of startup you’ve built. If you’re a Twitter or an Instagram, then your success is measured by user growth, not revenue generated. If you’re a B2B business that is selling SAAS solution to enterprise businesses, then success is measured by clients and revenue generated from clients.
Startups don’t fail because of salary issues. If a startup is running out of money, then the startup can just lay off all of their employees, cut costs, and go into survival mode. Startups fail when the founders give up. As long as the founders believe in the startup, believe that they’re solving a problem, and have the capital to keep moving forward, then the startup can keep running.
Sam: How do you go about deciding capital expenditure for your company? Do you use metrics such as an estimated payback period? If so, how many months would that be? There seems to be a real chicken or the egg scenario with capital expenditure. If you don’t build it and spend money, nobody will come.
Jun: We don’t have any estimated payback period at this point in the company. When we raised capital, we built a financial projections sheet that estimated our cost. We spend as much on people as is necessary. For example, we have 12 full-timers right now that are absolutely needed and we pay them less than market rate. We had 14 full-timers, but we let 2 people go because they just weren’t pulling their weight. “Fire fast” is one of the philosophies that we follow.
Something that’s funny is that before we raised an Angel round, we spent about $10K per month at most. Now that we’ve raised an Angel round, we’re spending $40K+ per month. When money comes in, you find ways to spend money for conferences, people, technology, and other things that can benefit the business. Entrepreneurs need to be disciplined and not spend money like crazy; they need to stay lean, stay hungry, and try to get as much value out of the money raised as possible.
Sam: How will you know if you have succeeded or failed with your startup? What are the metric you use to measure success?
Jun: Our metric is to exit for $50M – $75M in 3 – 5 years. We look to raise no more than $5M to make sure we retain a good amount of our equity.
Sam: What are some of the things that really are difficult to overcome when working at a startup? Given the Bay Area economy is booming again, has it been difficult to attract talent and good software engineers?
Jun: Hiring great talent is always a challenge. Great developers and designers are usually snatched up by the Googles and Facebooks of the Valley, so startups have a hard time finding top talent that will work for little pay.
We found one of our best developers straight out of high school. He’s going to go to Berkeley for college starting in August, and we hope that he stays with us at least part time. Here is a link to how we hired every person on the team: How to build a startup team.
We found a great designer via a friendly connection, but he was recently offered a better deal from another startup in the Valley which he accepted.
There are countless challenges that one must face at a startup: no money, no clients, no users, no designer, low team morale, no product; it’s a challenge every single day.
Sam: What are several attributes an entrepreneur must have in order to provide the best possible chance for startup success?
1) Persistence: You will hit the wall a million times before getting through it. If you give up easily, then stick to the corporate life
2) Self-starter: You must set your own tasks and your own objectives; there is no one telling you what to do and how to do it. If you’re waiting around for people to tell you what to do and how to do it, then stick to the corporate environment
3) Forward-thinking: It’s not about being book smart, or being able to memorize things, or being very organized. Your team looks to you to lead them to glory. You’re basically betting people’s time, money, and energy on an idea that you believe will exit for a lot of money – that’s a huge responsibility.
BEFORE GIVING IT A GO
Sam: Any final words of advice to those who are thinking of quitting their jobs and creating a startup full-time?
Jun: Pay off all of your debts before you quite your job. Furthermore, make sure you have a team and a decent idea before you quit your job. Once you have your team and your idea, apply to an incubator: Y Combinator, Tech Stars, 500 Startups.
When you apply, make sure to have more developers + designers than business people. The ideal team is 1 business, 1 designer, and 1 developer. Incubators are doing phenomenally well and will help you get started on the right track if this is your first startup.
Jun Loayza is the Co-Founder of RewardMe. Throughout his entrepreneurial career, Jun has sold 2 companies, failed with 2 companies, lead social campaigns for enterprises such as Levi’s, Activision, and LG, and written for Mashable, Personal Branding Blog, and Business Week. You can follow Jun on Twitter here and read his blog about startup success.
Great questions Sam. I’ve always wondered about a lot of the same q’s myself.
Jun that’s awesome you have a team of 12 now! I noticed there aren’t any ladies in your group but perhaps that’s due to the line of work? 🙂 Nice job hiring the high school grad, hope the school study load doesn’t overwhelm him in the Fall. I’m sure he has more energy than us older folks though.
Keep up the good work!
Financial Samurai says
12 man team is quite big indeed! Jun just has to be careful not to go crazy on the spending burn! PAce yourself brother!
Jun Loayza says
We’re of course keeping it as lean as possible.
We are hiring engineers, so if you know any ladies that our great at developing product let me know!
We’re a fun group of guys to work with 🙂
Awesome, will do. Small companies are so much fun. I bet you guys are having a blast!
Startups can also fail when the investors have too much leverage. Most founders wouldn’t want their creation to die at the first sign of trouble, but if investors don’t have faith, there isn’t much the founders can do.
A good VC is one who doesn’t interfere with the running of the company.
Financial Samurai says
It’s definitely a balancing act of how quick to expand with how much money. Fine line that just gets trickier the longer one exists!
Jun Loayza says
It really depends on the type of investor. I’ve seen investors replace the entire management board once they’ve invested into the company.
I’ve seen investors immediately sell a startup in order to get cash to put into another one.
VC ultimately want a great return on their investment – and they’ll do whatever it takes to achieve it