As a follow up to my previous post, I wanted to talk about a mindset I sometimes run into while speaking with startup founders: the idea that it's not okay to admit you want your business to make money, and that your motivation should only be your passion for solving the problem you're tackling.
Sometimes, this mindset is helpful. After all, startups are by no means a guarantee of future wealth. They often go out of business or get acquired for very little money. Having a motivation besides money to keep you going when times get tough (and they will get tough) can be very valuable.
However, this mindset can also be harmful - used as an excuse to not think realistically about the long term prospects of the business. Founders who are purely interested in solving a problem with no concern about whether they can make money from their solution may find themselves in a pretty rough spot: a couple years into the company, running out of money and unable to raise, and no easy way to turn revenue on, because they didn't plan for this. It's not a fun position to be in!
Founders in that position may find it tempting to blame investors - "they just don't understand, if they give me more money I can turn this around" but the cold, hard truth is that many investors operate at least partially on proof. If you've been running a business for a few years with no thoughts about how you're going to make money, you haven't given investors any proof that things will change if they give you more money.
This isn't to say that you need a perfect plan for profitability from day 1. Instead, you should do some basic research pretty early on, at whatever point you decide that you want the solution you're building to become a business. This research includes:
You'll notice this is similar to things you'll need to look into when doing market sizing. However, market sizing can be kind of deceptive because people tend to talk to in huge numbers and percentages. It's also often too vague. For example (numbers made up):
"There are 500,000 front end developers in the United States. If we capture just 10% of them at $50/month, we'll get to 2.5m in monthly revenue."
That sounds pretty good, right? But consider: 10% of 500,000 is 50,000 developers. For this plan to work, you need to get to 50,000 developers... and at the end of that, you'll only end up with 2.5m in monthly revenue - which is nothing to sneeze at, but it's only $30m annually - nowhere near enough for a unicorn valuation. And, of course - your product might not be the right fit for all front end developers anyway, so your numbers are likely overestimated.
Now, to be clear - if you do your research and end up with small numbers, it doesn't necessarily mean to need to put the brakes on whatever you're building. It just means that as you continue to build, you need to keep an eye out for opportunities to modify your offering to make it more valuable to potential users, so you can increase your price point, or make it easier to acquire lots of users.
Remember, not everything has to be a startup! Some things work better as non-profits or open source projects that take donations or side projects that make you some money. If you're truly passionate about the problem you're solving and can't figure out a way to turn it into a unicorn, that's okay. Look into other business models and go from there.
But, if you really want to start a venture backed startup... you should start thinking seriously about how you plan to make money sooner rather than later. It'll be worth it, trust me.
Need some helping thinking through your business? Grab 20 minutes with me!