Do you care about revenue or profit? Answer this question and I’ll tell you if you belong at a start-up or a big company.
Your quick response is enough to judge. “Real” businessmen will always be on the profit side. What’s the point of business if there’s no profit? And what’s the value of a business if not the discounted cash flows (profit in cash form)?
Yet, no entrepreneur or small company CEO I know cares much about profits, except as a way to validate their business as “profitable” or “cash flow positive.” Entrepreneurs talk about “run rates” and “growth,” both of which are measured in revenue.
Where’s the disconnect?
In the digital arena, there is a largely unspoken assumption that costs can be reduced by bringing businesses to scale and by applying technology. Many digital businesses build revenue by throwing bodies at the problem. Yahoo! originally had people classifying every site on the Internet to create their directory; Netflix had (and still has) people in warehouses sending out DVDs; GroupOn has salespeople calling every local business trying to create deals.
The assumption of eventual scale allows start-ups to focus on the really hard problem, attracting customers and their money – i.e. revenue. The assumption can be translated and parsed as “once the revenue is there at a sustained rate, the processes can be automated, technology can be applied to the problem, and the profits will follow.”
In larger companies there is far less tolerance for money-losing businesses. There is no shared assumption of future efficiency. So starting a new business in a larger company is a political minefield. Everyone who runs a profitable existing business will be wondering why the unprofitable new enterprise is allowed to exist. The expenditures on the unprofitable business will be scrutinized and concern will be expressed. It is in this way that new ideas are killed at bigger companies.
But what’s really interesting is what happens when the small, growing-but-unprofitable company is acquired by the larger, profit-seeking company. Under what criteria is it judged? Is it still allowed to grow to scale, or does the profit imperative kick-in too early to realize it’s ultimate objective?
So what do you want, profits or revenue?