11 ms·

Revenue is easy, profit is harder

301 points by rwaliany 4y ago

mostertoaster 4y ago
“This forced other disciplined startups to loosen their ad spend to be competitive in the venture-market industry and created an era of capital-inefficient businesses. With time, this will re-adjust back to historical norms and the process will be painful.” I thought this was a pertinent quote. You’re going to see many companies deciding to become cash flow positive instead of growing. And if the business is stable, the quickest way to get there is to drastically cut operating costs…
- bboygravity 4y ago
  > You’re going to see many companies deciding to become cash flow positive instead of growing. And if the business is stable, the quickest way to get there is to drastically cut operating costs… Or or do a public stock offering at a relatively high stock price after a short squeeze.
- wpietri 4y ago
  One of the interesting questions for me is how long this adaptation will take. I think there are a bunch of things that could make it pretty laggy. E.g., the fact that so many execs have spent so many years in an unsustainable capital environment. Or the amount of VC money still sloshing around waiting to be applied. Or the number of VCs who basically built their careers on these kinds of unsustainable businesses. How many will be able to admit that their special genius no longer applies, and was in fact the cause of a lot of problems in the long term?
  - coffeebeqn 4y ago
    Also many companies are probably just praying that one set of layoffs and improving inflation will get them to the next era of easy funding sometime in 2024
    - wpietri 4y ago
      It's a certainty. 20 years ago there was a bumper sticker: "Please god, just one more bubble". [1] https://www.bloomberg.com/news/articles/2004-08-15/commentary-please-god-just-one-more-bubble https://www.bloomberg.com/news/articles/2004-08-15/commentar...
robertlagrant 4y ago
As they say, revenue is vanity.
ghiculescu 4y ago
I love payback period, it's a great metric. But it's easy to take it too literally. It's meant to be a tool to help you make prioritization decisions ("what if we do this instead of that"), but people often use it as a management report ("we did this; here's the verdict"). Here's a SaaS example: if it costs you $1000 to acquire a customer that pays you $100/month, the PBP is 10. That doesn't sound amazing. But you have options! If you give the customer a 20% discount to pay annually, they're now paying you ~$1000 upfront, for a PBP of 0. Tweak the numbers slightly and you can get a negative payback period. Suddenly your "capital inefficient" business has a big flywheel without the need for outside capital. It's easy to think decreasing acquisition costs is what you need to do in the current market (and believe me, that's not a bad idea!), but that's the denominator. There's also a numerator - how much cash you bring in, and how quickly - that matters just as much. It's cash flow that matters, not profit.
- ecpottinger 4y ago
  My dad had great ideas for businesses. Yet each one he started failed for him. Why, because he has such unrealistic view on how long the payback period will be. He even founded with a partner what is now a national company, but at the time it did not make a big profit in the first year, so he sold his share of the business. He had "Get rich Quick" fever, and never saw that bussiness rarely become an overnight success.
  - birdyrooster 4y ago
    Interesting to think that the company which he divested from may have made it because of his exit.
    - petemc_ 4y ago
      Unless you have some information you're not sharing, this is a pretty horrible thing to say.
      - anonymous_sorry 4y ago
whatever1 4y ago
As seen at Amazon.com
- hef19898 4y ago
  How so? Amazon didn't jave that many unprofitable quarters, even less years, during its history. That Amazon was never profitable because they prioritized growth is a meme made up buy various start-ups to explain their lack of profits and/or positive cash flow.
  - wpietri 4y ago
    Are we looking at the same numbers? I think Amazon was basically breakeven for 20 years, from 1997 to 2017: https://www.marketplacepulse.com/stats/amazon-net-income-112 https://www.marketplacepulse.com/stats/amazon-net-income-112 And it looks like that recent profitability is more about AWS than their traditional core business: https://www.visualcapitalist.com/aws-powering-the-internet-and-amazons-profits/ https://www.visualcapitalist.com/aws-powering-the-internet-a...
    - gizmo 4y ago
      Yes, but how do you get to breakeven? By reinvesting all your profits. High capex and no taxes because you don't have any income. And you can still raise money by issuing stock, which goes up in line with your FCF. You maximize growth at 0 profit and this also maximizes shareholder value.
      - kgwgk 4y ago
        > High capex and no taxes because you don't have any income. And you can still raise money by issuing stock, which goes up in line with your FCF. With high capex your free cash flow will be even lower than your net income.
      - wpietri 4y ago
        So it sounds like you agree that they were "never profitable because they prioritized growth"? I'm not saying that's a bad thing; I think that ones of the things Bezos did right, and very much in contradiction to standard business dogma. I'
wpietri 4y ago
Is this true? > I have observed that few people understand these nuances and the significant role they play I've been out of the venture-backed world for a while, so it's an honest question. Few people understanding business basics would certainly explain a lot of recent behavior, but there are other possibilities too.
- gizmo 4y ago
  Literally every founder is capable of figuring out the basic unit economics of their business. But when VC money is abundant the unit economics don't matter because growth is the only metric worth tracking.
  - wpietri 4y ago
    Oh, I believe they're capable of figuring these things out. My question is whether they did. For example, I could imagine a founder who knew what a real business was, but just said, "In crazy times we'll do crazy things", took the VC money, and mainly shut up about the problems, while quietly trying to mitigate the risks. Or I could imagine that the OP is literally correct here, that many never bothered to figure this stuff out because it did not matter for the short term, and in fact would interfere with them projecting an SBF-grade aura of extreme confidence. I've certainly met people in both camps. I'm just wondering if the latter have truly become very common, or even possibly the majority in some circles.
deleted 4y ago
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gizmo 4y ago
This isn't another 2000 crash. The internet is much, much larger today. And the prize you get for being #1 in any market is enormous. It's so large that it pays to gamble with questionable growth strategies in the short term. Reasonable growth that balances LTV and CAC is nice and pragmatic but it's not a winning strategy when your competitors are putting the pedal to the metal.
- ghiculescu 4y ago
  On the contrary, I think the internet being bigger means the prize for being #2, 3, etc is great too. Very few markets are actually winner takes all.
  - leetrout 4y ago
    Yep! And the second / late mover advantage. For any that are unfamiliar: https://insight.kellogg.northwestern.edu/article/the_second_mover_advantage https://insight.kellogg.northwestern.edu/article/the_second_...
    - hackernewds 4y ago
      Jack Dorsey often says. You don't need to be first to market. You just need to be best to market. Demonstrated through Twitter, and now Cashapp
      - NegativeK 4y ago
        I'm reminded of the scene in Margin Call[1]: "There are three ways to make a living in this business: be first, be smarter, or cheat." [1] https://www.youtube.com/watch?v=Hhy7JUinlu0#t=6m22s https://www.youtube.com/watch?v=Hhy7JUinlu0#t=6m22s
        Eisenstein 4y ago
        That line was specifically about financial markets, not products.
hinata08 4y ago
Almost unrelated, but I also learned what was capital efficiency and payback period after playing Monopoly for the first time in years. Long story short, when the properties were eventually sold out, I burned my cash flow to buy more of them to other players, at a high price, when they needed money (it would also allow them to play longer) My logic was that by owning the most properties and by building houses and hotels, I would have the most revenue on the long run. And had the game been endless, I would have won. However, the chances of someone going on your property isn't even high in this game ! You can sometimes wait for several rounds before this happens. Unluckily, I stumbled on a rent I couldn't pay, mortgaged some properties. It happened again, and other players would only buy my properties at a price to cover the rent. And my empire (i had the most properties by far) was on the verge of collapse when I had to run to go to the station. So yeah, consider the payback period, even in the simplest models of the economy. Monopoly is economy taught to children, yet we adults can overlook its lessons.
- whitemary 4y ago
  Monopoly was literally invented to illustrate the deceptions of capitalism. Great game.
  - robertlagrant 4y ago
    It's the regulations that stop you building more places that are the issue : - )
    - ipaddr 4y ago
      The game has those rules. Can't build a hotel until you have 5 houses. In real life can't get a permit to build a hotel until you marry your first daughter off or can influence someone.
  - 8note 4y ago
    It's also there to convince people to switch to a land tax, but it's really not successful at it. I think because there's no land owners separate from building developers
deleted 4y ago
[deleted]
codegeek 4y ago
I would nitpick the title a bit. Revenue is never easy. I think they should rephrase as "Revenue is relatively easier than profit especially if you have PMF". Once you hit PMF (which is where most startups fail), you can just pour money into growth and that's when revenue generation becomes relatively easier.
- whiplash451 4y ago
  Can you elaborate on why most startups fail when they hit PMF?
  - majani 4y ago
    Usually bad unit economics. The whole "make losses now to jack up prices later" thing does not work in reality. Usually the whole market just gets poisoned and the only way out is to leave richer investors holding the bag
- qup 4y ago
  That's entirely more accurate, but a terrible title
- spencerchubb 4y ago
  If we're nitpicking, then it's redundant to say that revenue is relatively easier than profit. Profit is a subset of revenue
photochemsyn 4y ago
Remaining profitable is likely even harder, as other people will rush in and start providing similar products or services at competitive prices. In a heavily financialized system, the common solution is monopolization (buying up startup competition using pools of capital) - leading to situations like TicketMaster, which gets away with providing low quality-of-service to artists and their fans because they have no alternative to turn to. Unregulated markets in a finance-centric economy inevitably drift toward the controlled monopolistic model for this reason. Advocates for unregulated free-markets either don't understand this or are simply being deceptive and are really trying to maximize profits by promoting the growth of monopolies.
- whitemary 4y ago
  Regulated markets in a capital-centric economy serve, in aggregate, the interests of those who control capital, and therefore also drift toward monopoly. Liberals either don't understand this or are simply being deceptive by promoting the continuation of capitalism.
  - deleted 4y ago
    [deleted]
  - photochemsyn 4y ago
    Even highly socialist countries like Cuba found that introducing regulated markets was healthy for their economies. Now if 'those who control capital' are themselves a small minority of the overall population who act in concert - well, that's a financial monopoly, and of course there are ways to break up a financial monopoly of this nature, such as re-introducing Glass-Steagall provisions that separated commercial and investment banking, eliminating offshore and similar capital tax shelters, etc. Note that if it is a state body that controls all the capital and hence controls economic decisions like infrastructure development, this isn't so different in practice from having a small group of financiers controlling all the capital - in both cases you have a centrally-planned economy controlled by a small cabal that puts their own interests ahead of everyone else's.
kazinator 4y ago
Revenue is easy only if you ignore survivorship bias. Organizations without revenue perish. Organizations with revenue whose balance sheets don't show a profit don't necessarily perish.
- hinkley 4y ago
  Conversationally, though, you’ve got a bunch of founders sitting around over beers or at a convention, the ones who couldn’t make revenue aren’t there. Revenue is tables stakes for the conversation. You’ve already figured out the first part, but you haven’t figured out the hardest part.
- mrweasel 4y ago
  Sure, you need revenue to generate a profit, otherwise you'd be generating profits from nothing. You can also have organisations who are specifically "Not for profit", they balance sheets will frequently end up with a 0 dollars in profits each year, and that's as expected, but they too need revenue to do anything. For certain types of companies, revenue is easy. I worked to a company that did mostly consulting, but would also sell you hardware or software licenses, so customers only need to interact with us, and no one else. Technically we could just have given away hardware, and we frequently did sell servers at a lose. That shows up as revenue. As long as you have money or credit to sell expensive stuff at a lose, then revenue is easy. That's not the main point though. The point is measuring companies on revenue is pretty stupid, without also looking that profitability.
jossclimb 4y ago
Pretty much. I have seen so many startups over the past few years, with A rounds up to $25 even $50 million where the CEO has zero business experience, they are literally learning by the seat of their pants.. They have gone from some experience as a tech lead for a small team, to the next day to running a large company. Obviously, there will be the odd outlier Zuckerberg type, but many of them are going to be totally out of their depth when the burn rate and path to profit (or even revenue in some cases) start to close in. 2024 will be a bloodbath in the startup world.
- disgruntledphd2 4y ago
  To be fair, Zuckerberg hired lots and lots of experienced people early on, and listened to them. Honestly though, if he hadn't hired Sheryl Sandberg then Facebook would probably have failed as a business.
- jasmer 4y ago
  Zuck had no idea what he was doing, and a lot of these guys don't learn some basic things until much later on, or never do. When you have that kind of growth and that kind of money, frankly it's different anyhow - riding an explosionn is different than running a company, which is almost always 'operating'. CEO's are captains of ships with moving parts, experts, probably already a navigator, engineer, maps, standard port-to-port model etc.. In a way CEO's of established companies are 'overseers'. CEO's of compaanies blowing up is something different, it's not an optimization process it's usually a top-line process, and then maybe crude bottom line net-profit process while keeping enough wood in the fire.
maCDzP 4y ago
So I am a Silicon Valley outsider. I live in the northern EU and work with project management in the construction industry representing the owner. It’s mostly infrastructure, roads, water. Old industry, conservative, we basically hate new things. On my spare time I tinker with my computer, learn assembly or whatever. Hence HN. I have recently started a course in corporate finance at my local uni because my new role requires me to understand accounting, making business decision and so on. I haven’t finished my course, and I have to admit that I skimmed the article. So what I am about to say is probably wrong. It’s a feeling I have. I have the feeling that a lot of theses articles are pretty basic corporate finance. What I mean is that if you study and try to understand basic CF, you will gain the insights that many of these articles talk about. When I then read in the comments that there are cases where tech leads with no business experience get millions in funding and basically are learning by doing. Silicon Valley seems to be on another planet for me. It’s sounds surreal to me. If I was an investor I would never give that person money since projects are so extremely difficult. The wicked problem is a real thing. Or maybe I am just poor and don’t get how people with large amounts of cash think. I get that it’s a numbers game and you have a portfolio of companies, but still. Guys that are closer to SV, I would love to hear your thoughts on my thoughts.
- polynox 4y ago
  So you would refuse to fund Google (Larry and Sergei being PhD students at Stanford at the time) because they "[have] no business experience"?
  - kristianc 4y ago
    Google’s initial VC funding round pre-IPO was something like $25m. Even allowing for inflation you see that kind of money tossed around on pre-revenue NFT startups based on a pitch deck today.
    - threeseed 4y ago
      Can you provide examples. Pre-revenue NFT startup raising $25m pre-seed in this market ?
warren-williams 4y ago
I might be off, but why are you adding CAC back into Contribution Margin to determine LTV? This seems like more of a sunk cost that would imply 1x LTV/CAC than the 2x that you show? Other than that, nice article!
hinkley 4y ago
The number of times I’ve worked at a place where some sales asshole was trying to land $1 of revenue that was going to cost us $2.50 to achieve the deliverables… wtf are they teaching in business school? One place I worked, their strategy was to chase the “whales” first and get them as customers so we could use them to get other customers. So many problems there that only because apparent to these idiots afterward. First, big companies aren’t idiots. If you have next to nothing to offer, they’ll give you next to nothing in return. And once you have an exploitative contract, good luck renegotiating it once your product has improved. In this particular industry it was even worse, as we found out. The big companies felt like they were doing people a favor, the medium sized companies were just cheap. Only the little companies were hungry and humble enough to pay good money for good product, but now you have a product that’s been tilted toward the whims of much larger companies, which adds a lot of friction. Plus you’ve done all of your scalability work at the beginning when you are the least experienced with it. They did end up selling the company at a profit, but they had hoped for early retirement and all they got was comfortable living. I’m not convinced the buyers got a good deal on the terms either.
- simonswords82 4y ago
  Often this happens when a sales commission structure is misaligned with company profitability. The salesperson then cares more about commission and less about profit and generates revenue at any cost.
JohnFen 4y ago
This reminds me of an exchange I had with someone who wanted to enter into a business deal with me. He bragged about how his company had X millions in revenue. Since revenue was a meaningless figure to me in this context, I asked what their profit margin was. After hemming and hawing about it, he admitted the company was not profitable, and it became clear it was unlikely to become profitable anytime soon.
- hackernewds 4y ago
  You can just say you were talking to the founders of Lyft.
blobbers 4y ago
GAAP accounting is for stable cash flows in well understood businesses. Bootstrapping (funding growth with revenue) isn't the silicon valley way; the silicon valley method is as follows: 1. get funding 2. grow team/build product 3. raise more funding and find product market fit 4. seize control of market / make large top line moneys 5. repeat 3/4 a as necessary. 6. acquisition/IPO, shareholders payout.
- hef19898 4y ago
  As soon as a company IPOs, or uses a SPAC, it is either GAAP or IRSF accounting. And it doesn't matter what the comoany might think about that.
  - blobbers 4y ago
    No, they'll run GAAP statements but everything they report in their earnings calls will be non-GAAP.
tiffanyh 4y ago
I could generate huge revenues selling $100 gift cards for 80 bucks. But I wouldn’t be generating much profit.
fatfox 4y ago
We’ve created a generation of leadership people who never learned how to make a profit. Until last year, if you were focusing on unit economics, you were laughed out of the room. Fast growth and market share at all cost…
- deleted 4y ago
  [deleted]
lumb63 4y ago
I disagree wholly with the “revenue is easy, profit is harder” idea. I suppose it is tautologically true since profitable ventures are a subset of ones which generate revenue, so more businesses generate revenue than generate profits, thus it is is “easier”. However, that is only at the present instant. That statement does not factor in all the companies that generated only revenue and no profit and are now extinct. When considering these, it is vastly easier to be profitable than to have revenue. Without infusions of external capital it is literally impossible to generate revenue without profit for any period longer than one can sustain their losses. Isn’t it way easier to focus on businesses that do this, that meet a demand people have, and are thus profitable? Instead, investments are made in areas where demand has to be induced via advertising spend, expenses have to be reduced by relying on the ability to “rapidly scale”, and the business has to sap round after round of investor capital at increasingly higher and increasingly more ridiculous valuations with the hopes that it can weather that storm. When considering the above, it seems to me that we are systematically mis-allocating capital to bad investments. As the saying goes, a bird in the hand is worth two in the bush. You can see people behaving in accordance with this during high-risk periods, e.g. COVID, when capital shifted toward durable goods and physical assets (pre QE infinity). But for some reason, when the risk is not literally right in front of investors, they do not see it. That risk, the integral of which increases over larger periods of time, eats away at the growth rates of companies. I suspect risk would spoil the math that makes a lot of the high-growth companies worth anything, if it were properly accounted for. Not to mention, negative externalities are unknown and thus largely ignored in startups, and thus cannot be accounted for.
AlbertCory 4y ago
This is an accounting method that's different from the traditional ones. That's not to say it's wrong. It's just interesting. However, "customer acquisition cost" seems to imply that that customer is now "yours" and he'll keep buying without any more spending from you. That assumption is questionable. Maybe he's just on loan to you, and fickle as all hell. Did Uber "acquire" me just because I used them a few times? Traditional accounting is "fixed cost" plus "variable cost." You build your factory (fixed cost), and then produce widgets (variable cost). For a long time, you're amortizing the fixed costs, and eventually the price of the widgets is all profit, assuming the factory still runs. In that method, every customer is a random draw from a raffle, and you have no guarantees that the customer will keep buying. They may, but they may not. You have to keep getting new ones to even keep your base stable.
- ZephyrBlu 4y ago
  This is primarily a growth model/strategy not an accounting method, and these metrics have been very common in startupland for quite a few years. Customer acquisition cost (CAC) is paired with lifetime value (LTV). The length of time you're on "loan" to the company doesn't really matter as long as LTV is higher than CAC. This model is commonly used for subscription businesses, where assuming each purchase is independent is not really appropriate because they are recurring.
- hinkley 4y ago
  > However, "customer acquisition cost" seems to imply that that customer is now "yours" I’ve confused a few people this ways in conversation lately and I’m not sure what the solution is, but it’s a case of saying, “even the most optimistic scenario is still very bad”. Keeping someone’s attention is never going to be cheaper than getting it in the first place. The best you can do is spend a maintenance cost to retain them, in which case if enough time passes and enough repeat business happens then the profitability of that customer keeps going up. But you’re going to hit an asymptote that looks like Amdahl’s law, and dictated by those investments.
  - AlbertCory 4y ago
    Thanks. Subscriptions always seemed to me like they were for the business' benefit, not for mine. I'm sure it does make the growth models look really good; you've got this nice, regular stream of money coming in. However, it does nothing for the customer. I refuse to subscribe to anything, as a rule. Deliver some value, and I'll pay for it when I need it. YMMV.
ckdarby 4y ago
I am an amazing "2nd in command" employee. I struggle taking nothing to something and the dedication required to get market fit to build revenue. On the other hand I find building profit one of the most enjoyable and fun things! I've now successfully more than 3 times in a row taken ~$100M revenue and grown it via new top/bottom around 10-15%. I think it takes a different kind of person to optimize for income than just purely growing revenue.

301 points by rwaliany 4y ago

“This forced other disciplined startups to loosen their ad spend to be competitive in the venture-market industry and created an era of capital-inefficient businesses. With time, this will re-adjust back to historical norms and the process will be painful.” I thought this was a pertinent quote. You’re going to see many companies deciding to become cash flow positive instead of growing. And if the business is stable, the quickest way to get there is to drastically cut operating costs…

bboygravity 4y ago
> You’re going to see many companies deciding to become cash flow positive instead of growing. And if the business is stable, the quickest way to get there is to drastically cut operating costs… Or or do a public stock offering at a relatively high stock price after a short squeeze.
wpietri 4y ago
One of the interesting questions for me is how long this adaptation will take. I think there are a bunch of things that could make it pretty laggy. E.g., the fact that so many execs have spent so many years in an unsustainable capital environment. Or the amount of VC money still sloshing around waiting to be applied. Or the number of VCs who basically built their careers on these kinds of unsustainable businesses. How many will be able to admit that their special genius no longer applies, and was in fact the cause of a lot of problems in the long term?
- coffeebeqn 4y ago
  Also many companies are probably just praying that one set of layoffs and improving inflation will get them to the next era of easy funding sometime in 2024
  - wpietri 4y ago
    It's a certainty. 20 years ago there was a bumper sticker: "Please god, just one more bubble". [1] https://www.bloomberg.com/news/articles/2004-08-15/commentary-please-god-just-one-more-bubble https://www.bloomberg.com/news/articles/2004-08-15/commentar...

robertlagrant 4y ago

As they say, revenue is vanity.

ghiculescu 4y ago

I love payback period, it's a great metric. But it's easy to take it too literally. It's meant to be a tool to help you make prioritization decisions ("what if we do this instead of that"), but people often use it as a management report ("we did this; here's the verdict"). Here's a SaaS example: if it costs you $1000 to acquire a customer that pays you $100/month, the PBP is 10. That doesn't sound amazing. But you have options! If you give the customer a 20% discount to pay annually, they're now paying you ~$1000 upfront, for a PBP of 0. Tweak the numbers slightly and you can get a negative payback period. Suddenly your "capital inefficient" business has a big flywheel without the need for outside capital. It's easy to think decreasing acquisition costs is what you need to do in the current market (and believe me, that's not a bad idea!), but that's the denominator. There's also a numerator - how much cash you bring in, and how quickly - that matters just as much. It's cash flow that matters, not profit.

ecpottinger 4y ago
My dad had great ideas for businesses. Yet each one he started failed for him. Why, because he has such unrealistic view on how long the payback period will be. He even founded with a partner what is now a national company, but at the time it did not make a big profit in the first year, so he sold his share of the business. He had "Get rich Quick" fever, and never saw that bussiness rarely become an overnight success.
- birdyrooster 4y ago
  Interesting to think that the company which he divested from may have made it because of his exit.
  - petemc_ 4y ago
    Unless you have some information you're not sharing, this is a pretty horrible thing to say.
    - anonymous_sorry 4y ago

whatever1 4y ago

As seen at Amazon.com

hef19898 4y ago
How so? Amazon didn't jave that many unprofitable quarters, even less years, during its history. That Amazon was never profitable because they prioritized growth is a meme made up buy various start-ups to explain their lack of profits and/or positive cash flow.
- wpietri 4y ago
  Are we looking at the same numbers? I think Amazon was basically breakeven for 20 years, from 1997 to 2017: https://www.marketplacepulse.com/stats/amazon-net-income-112 https://www.marketplacepulse.com/stats/amazon-net-income-112 And it looks like that recent profitability is more about AWS than their traditional core business: https://www.visualcapitalist.com/aws-powering-the-internet-and-amazons-profits/ https://www.visualcapitalist.com/aws-powering-the-internet-a...
  - gizmo 4y ago
    Yes, but how do you get to breakeven? By reinvesting all your profits. High capex and no taxes because you don't have any income. And you can still raise money by issuing stock, which goes up in line with your FCF. You maximize growth at 0 profit and this also maximizes shareholder value.
    - kgwgk 4y ago
      > High capex and no taxes because you don't have any income. And you can still raise money by issuing stock, which goes up in line with your FCF. With high capex your free cash flow will be even lower than your net income.
    - wpietri 4y ago
      So it sounds like you agree that they were "never profitable because they prioritized growth"? I'm not saying that's a bad thing; I think that ones of the things Bezos did right, and very much in contradiction to standard business dogma. I'

wpietri 4y ago

Is this true? > I have observed that few people understand these nuances and the significant role they play I've been out of the venture-backed world for a while, so it's an honest question. Few people understanding business basics would certainly explain a lot of recent behavior, but there are other possibilities too.

gizmo 4y ago
Literally every founder is capable of figuring out the basic unit economics of their business. But when VC money is abundant the unit economics don't matter because growth is the only metric worth tracking.
- wpietri 4y ago
  Oh, I believe they're capable of figuring these things out. My question is whether they did. For example, I could imagine a founder who knew what a real business was, but just said, "In crazy times we'll do crazy things", took the VC money, and mainly shut up about the problems, while quietly trying to mitigate the risks. Or I could imagine that the OP is literally correct here, that many never bothered to figure this stuff out because it did not matter for the short term, and in fact would interfere with them projecting an SBF-grade aura of extreme confidence. I've certainly met people in both camps. I'm just wondering if the latter have truly become very common, or even possibly the majority in some circles.

deleted 4y ago

[deleted]

gizmo 4y ago

This isn't another 2000 crash. The internet is much, much larger today. And the prize you get for being #1 in any market is enormous. It's so large that it pays to gamble with questionable growth strategies in the short term. Reasonable growth that balances LTV and CAC is nice and pragmatic but it's not a winning strategy when your competitors are putting the pedal to the metal.

ghiculescu 4y ago
On the contrary, I think the internet being bigger means the prize for being #2, 3, etc is great too. Very few markets are actually winner takes all.
- leetrout 4y ago
  Yep! And the second / late mover advantage. For any that are unfamiliar: https://insight.kellogg.northwestern.edu/article/the_second_mover_advantage https://insight.kellogg.northwestern.edu/article/the_second_...
  - hackernewds 4y ago
    Jack Dorsey often says. You don't need to be first to market. You just need to be best to market. Demonstrated through Twitter, and now Cashapp
    - NegativeK 4y ago
      I'm reminded of the scene in Margin Call[1]: "There are three ways to make a living in this business: be first, be smarter, or cheat." [1] https://www.youtube.com/watch?v=Hhy7JUinlu0#t=6m22s https://www.youtube.com/watch?v=Hhy7JUinlu0#t=6m22s
      - Eisenstein 4y ago
        That line was specifically about financial markets, not products.

hinata08 4y ago

Almost unrelated, but I also learned what was capital efficiency and payback period after playing Monopoly for the first time in years. Long story short, when the properties were eventually sold out, I burned my cash flow to buy more of them to other players, at a high price, when they needed money (it would also allow them to play longer) My logic was that by owning the most properties and by building houses and hotels, I would have the most revenue on the long run. And had the game been endless, I would have won. However, the chances of someone going on your property isn't even high in this game ! You can sometimes wait for several rounds before this happens. Unluckily, I stumbled on a rent I couldn't pay, mortgaged some properties. It happened again, and other players would only buy my properties at a price to cover the rent. And my empire (i had the most properties by far) was on the verge of collapse when I had to run to go to the station. So yeah, consider the payback period, even in the simplest models of the economy. Monopoly is economy taught to children, yet we adults can overlook its lessons.

whitemary 4y ago
Monopoly was literally invented to illustrate the deceptions of capitalism. Great game.
- robertlagrant 4y ago
  It's the regulations that stop you building more places that are the issue : - )
  - ipaddr 4y ago
    The game has those rules. Can't build a hotel until you have 5 houses. In real life can't get a permit to build a hotel until you marry your first daughter off or can influence someone.
- 8note 4y ago
  It's also there to convince people to switch to a land tax, but it's really not successful at it. I think because there's no land owners separate from building developers

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codegeek 4y ago

I would nitpick the title a bit. Revenue is never easy. I think they should rephrase as "Revenue is relatively easier than profit especially if you have PMF". Once you hit PMF (which is where most startups fail), you can just pour money into growth and that's when revenue generation becomes relatively easier.

whiplash451 4y ago
Can you elaborate on why most startups fail when they hit PMF?
- majani 4y ago
  Usually bad unit economics. The whole "make losses now to jack up prices later" thing does not work in reality. Usually the whole market just gets poisoned and the only way out is to leave richer investors holding the bag
qup 4y ago
That's entirely more accurate, but a terrible title
spencerchubb 4y ago
If we're nitpicking, then it's redundant to say that revenue is relatively easier than profit. Profit is a subset of revenue

photochemsyn 4y ago

Remaining profitable is likely even harder, as other people will rush in and start providing similar products or services at competitive prices. In a heavily financialized system, the common solution is monopolization (buying up startup competition using pools of capital) - leading to situations like TicketMaster, which gets away with providing low quality-of-service to artists and their fans because they have no alternative to turn to. Unregulated markets in a finance-centric economy inevitably drift toward the controlled monopolistic model for this reason. Advocates for unregulated free-markets either don't understand this or are simply being deceptive and are really trying to maximize profits by promoting the growth of monopolies.

whitemary 4y ago
Regulated markets in a capital-centric economy serve, in aggregate, the interests of those who control capital, and therefore also drift toward monopoly. Liberals either don't understand this or are simply being deceptive by promoting the continuation of capitalism.
- deleted 4y ago
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- photochemsyn 4y ago
  Even highly socialist countries like Cuba found that introducing regulated markets was healthy for their economies. Now if 'those who control capital' are themselves a small minority of the overall population who act in concert - well, that's a financial monopoly, and of course there are ways to break up a financial monopoly of this nature, such as re-introducing Glass-Steagall provisions that separated commercial and investment banking, eliminating offshore and similar capital tax shelters, etc. Note that if it is a state body that controls all the capital and hence controls economic decisions like infrastructure development, this isn't so different in practice from having a small group of financiers controlling all the capital - in both cases you have a centrally-planned economy controlled by a small cabal that puts their own interests ahead of everyone else's.

kazinator 4y ago

Revenue is easy only if you ignore survivorship bias. Organizations without revenue perish. Organizations with revenue whose balance sheets don't show a profit don't necessarily perish.

hinkley 4y ago
Conversationally, though, you’ve got a bunch of founders sitting around over beers or at a convention, the ones who couldn’t make revenue aren’t there. Revenue is tables stakes for the conversation. You’ve already figured out the first part, but you haven’t figured out the hardest part.
mrweasel 4y ago
Sure, you need revenue to generate a profit, otherwise you'd be generating profits from nothing. You can also have organisations who are specifically "Not for profit", they balance sheets will frequently end up with a 0 dollars in profits each year, and that's as expected, but they too need revenue to do anything. For certain types of companies, revenue is easy. I worked to a company that did mostly consulting, but would also sell you hardware or software licenses, so customers only need to interact with us, and no one else. Technically we could just have given away hardware, and we frequently did sell servers at a lose. That shows up as revenue. As long as you have money or credit to sell expensive stuff at a lose, then revenue is easy. That's not the main point though. The point is measuring companies on revenue is pretty stupid, without also looking that profitability.

jossclimb 4y ago

Pretty much. I have seen so many startups over the past few years, with A rounds up to $25 even $50 million where the CEO has zero business experience, they are literally learning by the seat of their pants.. They have gone from some experience as a tech lead for a small team, to the next day to running a large company. Obviously, there will be the odd outlier Zuckerberg type, but many of them are going to be totally out of their depth when the burn rate and path to profit (or even revenue in some cases) start to close in. 2024 will be a bloodbath in the startup world.

disgruntledphd2 4y ago
To be fair, Zuckerberg hired lots and lots of experienced people early on, and listened to them. Honestly though, if he hadn't hired Sheryl Sandberg then Facebook would probably have failed as a business.
jasmer 4y ago
Zuck had no idea what he was doing, and a lot of these guys don't learn some basic things until much later on, or never do. When you have that kind of growth and that kind of money, frankly it's different anyhow - riding an explosionn is different than running a company, which is almost always 'operating'. CEO's are captains of ships with moving parts, experts, probably already a navigator, engineer, maps, standard port-to-port model etc.. In a way CEO's of established companies are 'overseers'. CEO's of compaanies blowing up is something different, it's not an optimization process it's usually a top-line process, and then maybe crude bottom line net-profit process while keeping enough wood in the fire.

maCDzP 4y ago

So I am a Silicon Valley outsider. I live in the northern EU and work with project management in the construction industry representing the owner. It’s mostly infrastructure, roads, water. Old industry, conservative, we basically hate new things. On my spare time I tinker with my computer, learn assembly or whatever. Hence HN. I have recently started a course in corporate finance at my local uni because my new role requires me to understand accounting, making business decision and so on. I haven’t finished my course, and I have to admit that I skimmed the article. So what I am about to say is probably wrong. It’s a feeling I have. I have the feeling that a lot of theses articles are pretty basic corporate finance. What I mean is that if you study and try to understand basic CF, you will gain the insights that many of these articles talk about. When I then read in the comments that there are cases where tech leads with no business experience get millions in funding and basically are learning by doing. Silicon Valley seems to be on another planet for me. It’s sounds surreal to me. If I was an investor I would never give that person money since projects are so extremely difficult. The wicked problem is a real thing. Or maybe I am just poor and don’t get how people with large amounts of cash think. I get that it’s a numbers game and you have a portfolio of companies, but still. Guys that are closer to SV, I would love to hear your thoughts on my thoughts.

polynox 4y ago
So you would refuse to fund Google (Larry and Sergei being PhD students at Stanford at the time) because they "[have] no business experience"?
- kristianc 4y ago
  Google’s initial VC funding round pre-IPO was something like $25m. Even allowing for inflation you see that kind of money tossed around on pre-revenue NFT startups based on a pitch deck today.
  - threeseed 4y ago
    Can you provide examples. Pre-revenue NFT startup raising $25m pre-seed in this market ?

warren-williams 4y ago

I might be off, but why are you adding CAC back into Contribution Margin to determine LTV? This seems like more of a sunk cost that would imply 1x LTV/CAC than the 2x that you show? Other than that, nice article!

hinkley 4y ago

The number of times I’ve worked at a place where some sales asshole was trying to land $1 of revenue that was going to cost us $2.50 to achieve the deliverables… wtf are they teaching in business school? One place I worked, their strategy was to chase the “whales” first and get them as customers so we could use them to get other customers. So many problems there that only because apparent to these idiots afterward. First, big companies aren’t idiots. If you have next to nothing to offer, they’ll give you next to nothing in return. And once you have an exploitative contract, good luck renegotiating it once your product has improved. In this particular industry it was even worse, as we found out. The big companies felt like they were doing people a favor, the medium sized companies were just cheap. Only the little companies were hungry and humble enough to pay good money for good product, but now you have a product that’s been tilted toward the whims of much larger companies, which adds a lot of friction. Plus you’ve done all of your scalability work at the beginning when you are the least experienced with it. They did end up selling the company at a profit, but they had hoped for early retirement and all they got was comfortable living. I’m not convinced the buyers got a good deal on the terms either.

simonswords82 4y ago
Often this happens when a sales commission structure is misaligned with company profitability. The salesperson then cares more about commission and less about profit and generates revenue at any cost.

JohnFen 4y ago

This reminds me of an exchange I had with someone who wanted to enter into a business deal with me. He bragged about how his company had X millions in revenue. Since revenue was a meaningless figure to me in this context, I asked what their profit margin was. After hemming and hawing about it, he admitted the company was not profitable, and it became clear it was unlikely to become profitable anytime soon.

hackernewds 4y ago
You can just say you were talking to the founders of Lyft.

blobbers 4y ago

GAAP accounting is for stable cash flows in well understood businesses. Bootstrapping (funding growth with revenue) isn't the silicon valley way; the silicon valley method is as follows: 1. get funding 2. grow team/build product 3. raise more funding and find product market fit 4. seize control of market / make large top line moneys 5. repeat 3/4 a as necessary. 6. acquisition/IPO, shareholders payout.

hef19898 4y ago
As soon as a company IPOs, or uses a SPAC, it is either GAAP or IRSF accounting. And it doesn't matter what the comoany might think about that.
- blobbers 4y ago
  No, they'll run GAAP statements but everything they report in their earnings calls will be non-GAAP.

tiffanyh 4y ago

I could generate huge revenues selling $100 gift cards for 80 bucks. But I wouldn’t be generating much profit.

fatfox 4y ago

We’ve created a generation of leadership people who never learned how to make a profit. Until last year, if you were focusing on unit economics, you were laughed out of the room. Fast growth and market share at all cost…

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lumb63 4y ago

I disagree wholly with the “revenue is easy, profit is harder” idea. I suppose it is tautologically true since profitable ventures are a subset of ones which generate revenue, so more businesses generate revenue than generate profits, thus it is is “easier”. However, that is only at the present instant. That statement does not factor in all the companies that generated only revenue and no profit and are now extinct. When considering these, it is vastly easier to be profitable than to have revenue. Without infusions of external capital it is literally impossible to generate revenue without profit for any period longer than one can sustain their losses. Isn’t it way easier to focus on businesses that do this, that meet a demand people have, and are thus profitable? Instead, investments are made in areas where demand has to be induced via advertising spend, expenses have to be reduced by relying on the ability to “rapidly scale”, and the business has to sap round after round of investor capital at increasingly higher and increasingly more ridiculous valuations with the hopes that it can weather that storm. When considering the above, it seems to me that we are systematically mis-allocating capital to bad investments. As the saying goes, a bird in the hand is worth two in the bush. You can see people behaving in accordance with this during high-risk periods, e.g. COVID, when capital shifted toward durable goods and physical assets (pre QE infinity). But for some reason, when the risk is not literally right in front of investors, they do not see it. That risk, the integral of which increases over larger periods of time, eats away at the growth rates of companies. I suspect risk would spoil the math that makes a lot of the high-growth companies worth anything, if it were properly accounted for. Not to mention, negative externalities are unknown and thus largely ignored in startups, and thus cannot be accounted for.

AlbertCory 4y ago

This is an accounting method that's different from the traditional ones. That's not to say it's wrong. It's just interesting. However, "customer acquisition cost" seems to imply that that customer is now "yours" and he'll keep buying without any more spending from you. That assumption is questionable. Maybe he's just on loan to you, and fickle as all hell. Did Uber "acquire" me just because I used them a few times? Traditional accounting is "fixed cost" plus "variable cost." You build your factory (fixed cost), and then produce widgets (variable cost). For a long time, you're amortizing the fixed costs, and eventually the price of the widgets is all profit, assuming the factory still runs. In that method, every customer is a random draw from a raffle, and you have no guarantees that the customer will keep buying. They may, but they may not. You have to keep getting new ones to even keep your base stable.

ZephyrBlu 4y ago
This is primarily a growth model/strategy not an accounting method, and these metrics have been very common in startupland for quite a few years. Customer acquisition cost (CAC) is paired with lifetime value (LTV). The length of time you're on "loan" to the company doesn't really matter as long as LTV is higher than CAC. This model is commonly used for subscription businesses, where assuming each purchase is independent is not really appropriate because they are recurring.
hinkley 4y ago
> However, "customer acquisition cost" seems to imply that that customer is now "yours" I’ve confused a few people this ways in conversation lately and I’m not sure what the solution is, but it’s a case of saying, “even the most optimistic scenario is still very bad”. Keeping someone’s attention is never going to be cheaper than getting it in the first place. The best you can do is spend a maintenance cost to retain them, in which case if enough time passes and enough repeat business happens then the profitability of that customer keeps going up. But you’re going to hit an asymptote that looks like Amdahl’s law, and dictated by those investments.
- AlbertCory 4y ago
  Thanks. Subscriptions always seemed to me like they were for the business' benefit, not for mine. I'm sure it does make the growth models look really good; you've got this nice, regular stream of money coming in. However, it does nothing for the customer. I refuse to subscribe to anything, as a rule. Deliver some value, and I'll pay for it when I need it. YMMV.

ckdarby 4y ago

I am an amazing "2nd in command" employee. I struggle taking nothing to something and the dedication required to get market fit to build revenue. On the other hand I find building profit one of the most enjoyable and fun things! I've now successfully more than 3 times in a row taken ~$100M revenue and grown it via new top/bottom around 10-15%. I think it takes a different kind of person to optimize for income than just purely growing revenue.