[HN Gopher] The Profitable Startup
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The Profitable Startup
Author : tommoor
Score : 104 points
Date : 2025-02-21 17:41 UTC (5 hours ago)
(HTM) web link (linear.app)
(TXT) w3m dump (linear.app)
| api wrote:
| The reason for prioritizing growth above all else, historically,
| is network effects. If you try to grow more slowly someone buying
| growth by foregoing profitability will zoom past you and capture
| the network, and once the network is captured it's incredibly
| difficult to disrupt.
|
| A good recent lesson in the awesome power of network effects is
| X. A huge number of users on that platform hate the direction
| Elon -- and it -- have taken, but they still use it. Major brands
| still use it. Governments targeted by people Elon is amplifying
| use it. Journalists who hate it use it. Why? People use it
| because people use it, and it's hard to get everyone to migrate
| at once.
|
| Network effects are a force of nature. They are the strongest
| possible lock-in.
| kva wrote:
| This Or "Learning Curve Pricing" which dominated the outcomes
| of early SV.
| rexreed wrote:
| I wouldn't necessarily call growth-hacking / blitzscaling to
| capture customers at a loss network effects. More accurately
| it's about cornering the market or dominating market share.
| Network effects are more prominent for things like social media
| networks where the network value grows exponentially with
| scale. But not as much for a B2C or B2B solution where there's
| an identifiable or fixed number of customers and the rocket
| fueled competitor captures them all with unsustainable pricing.
| pclowes wrote:
| I forget exactly who said it but somebody said something along
| the lines of "venture capital is rocket fuel, unless you have a
| rocket it will only blow up your engine. Have a Bugatti Veyron?
| It will blow up your engine."
|
| This is also something DHH has been saying for years. However, I
| think it is more true now than ever. With how easy it is to start
| and scale a software company I really struggle to understand the
| justification for venture funding at the earliest stage, unless
| you want to larp as a founder, have low conviction, or just want
| "the experience".
| sfvisser wrote:
| You probably know answer and just hyperboling here, but there
| are plenty of reasons to raise as a startup. Even in pure
| software.
|
| Most obvious one is you're building something actually
| technically challenging and need to grow your team to get
| there. People, especially great people, are bloody expensive.
| No way to afford any reasonable headcount as a 22yo first time
| founder without venture money.
|
| Of course, simple ideas are easy and need less resources and
| might be bootstrapped, hard ideas less so.
| pclowes wrote:
| Maybe for something truly novel, but the exception proves the
| rule here IMO.
|
| What is an example of a not simple idea pure software play
| that would require VC funding at the earliest stage?
| twunde wrote:
| VC funding is often required for companies that require a
| lot of runway prior to selling. The example that comes to
| mind are database companies like Mongo, dgraph, scylla etc.
| These require a fair amount of upfront work to create the
| product before their usable. A different example are
| industries that require a fair amount of compliance like
| healthcare, banking etc
| jononor wrote:
| You could have customers commit money upfront. You could do
| it slowly with a reduced headcount. You could raise money,
| but not from VCs. You could have a solutions/consulting team
| that brings in the bucks while financing product development.
| amoorthy wrote:
| Agreed. Put another way: because software has low marginal
| cost and high up-front cost (even higher in very competitive
| markets) it makes sense to raise venture early to hire a
| great team and build an awesome product that then scales
| incredibly well (great investment returns).
| vasco wrote:
| My usual take on this is that if you do a great job, you'll grow
| at the speed your market is growing, ride the wave so to speak.
| The price of admission is doing a great job though, the rest of
| the comment doesn't apply blindly.
|
| If your market is having a hockey stick growth because it's new
| or in vogue, even underperforming teams will outgrow the best
| team in the world stuck in a linear growth market.
|
| So I chuckle a bit when founders try to convince you that they
| are the reason for the hockey stick, or that they are the reason
| for the linear growth. You're riding the wave more than anything.
| The main difference then being if you end up being the one chosen
| by Softbank to aggregate the market or if you'll be one of the
| ones that are bought out by them.
| mtrovo wrote:
| I think the author is correct that more startups can be
| profitable earlier than they think. It comes down to making
| conscious decisions about hiring and focusing on customer value,
| it's that simple. The reason why that's not the case often comes
| from how blitzscaling and ZIRP became the norm for a few years,
| and how VC, especially post seed stage, started to resemble a
| Ponzi scheme, with investors trying to put lipstick on a pig and
| pass the bag down the road.
| earnesti wrote:
| The fact is, that for VC's it makes perfect sense to push for
| growth as much as possible. For every one of their portfolio
| startups. That doesn't necessarily make sense for the founders,
| who likely might prefer lower risk and profits instead.
|
| VC's don't care about mediocre successes. They want couple of
| huge exits, and if the rest go bankrupt, they don't give a
| shit. That's the VC business model and all the great company-
| building "advice" they give, is actually just crafted to
| generate profits to them, not really to make sense for the
| founders or other stakeholders.
| fuzztester wrote:
| >They want couple of huge exits,
|
| yes, exactly. what they want is what they (used to) call ten-
| baggers. meaning 10x their investment, prolly, I don't
| remember the exact meaning.
|
| I said "used to", because that is from sometime ago, before
| the fuckheaded idea of so-called unicorns.
|
| nowadays they want a million times their investment.
| rexreed wrote:
| Profitable startup works for founders, but it doesn't work for
| the venture capital industry.
|
| But it's hard to be a profitable, bootstrapped startup when
| rocket fueled / venture-backed startups are too busy growth
| hacking and venture-funded blitzscaling to capture customers at
| low cost to the customer, only later to screw the customer when
| it comes time to either flip the company to a buyer in order to
| return those VC dollars, or to turn the screws on the customers
| and enshittify the product when blitzscaling is no longer
| feasible.
|
| Personally, I prefer a bootstrapped, profitable startup in
| markets where blitzscaling venture-backed rockets aren't raiding
| the customers.
| esafak wrote:
| Profitability is good for product quality, if you can stay
| afloat, but it is a choice; venture capital lets you trade
| profitability for growth. And once you are big, you are able to
| cater to enterprises with deeper pockets to pay down your debt.
| tiffanyh wrote:
| While I love companies that become profitable early and grow at a
| rate that allows them to continue being profitable ... it becomes
| an issue with investors.
|
| Linear has raised over $50M+ (at $400MM valuation)
|
| You just can't grow fast enough while being profitable - to grow
| into & surpass that kind of valuation ... in a timeframe ok
| that's for your investors.
|
| https://tracxn.com/d/companies/linear/__xC97n-jdX7VZjDBpNyRf...
| earnesti wrote:
| It is great for founders, and not so nice for VC investors, and
| Karri seems comically oblivious to that fact.
| brettgriffin wrote:
| He's not oblivious to this and the answer lies in "Raise on
| Your Own Terms" section.
|
| Linear raised its A during the 2020-2021 frenzy and its
| Series B when every VC was telling their portfolio companies
| to reduce burn and get a 4-5 year runway. They created a
| profitable business in between.
|
| They get to do every single thing exactly how they want to
| until they raise again (if they ever do).
| enra wrote:
| Correct. Those raises were made when there was some
| uncertainty about how the business would grow, and the
| opportunity and timing seemed right. For example, in 2022,
| it was difficult to predict how deep the market downturn
| would be. We saw several customers churn because their
| companies folded. In the end, the market didn't tank as bad
| than some expected, and we executed better than
| anticipated. In hindsight, we might not have needed that
| funding, but at the time, the outlook wasn't as clear.
|
| Part of this post is to debunk the myth that can be VC
| backed startup, be profitable and grow fast at the same
| time. VCs are quite keen in this approach too.
| eawgewag wrote:
| Wow.. really changes my perspective on this article to find out
| that Linear has raised 50M+
|
| Thanks for this source
| rvz wrote:
| > While I love companies that become profitable early and grow
| at a rate that allows them to continue being profitable ... it
| becomes an issue with investors.
|
| You know what? Good, and hopefully Linear sets the example
| instead of the others just running back to VCs again for
| another top-up.
|
| Once you have shown that you're profitable, then you don't need
| them. The moment you do, you're always having to cede control
| and be at their mercy after raising and burning ridiculous
| amounts of their money and losing parts of your business.
|
| Of course VCs see that as an issue as they feed on startups by
| doing this. If you're profitable then you don't need them.
|
| Otherwise, you'll be on your Series Z until there are no more
| investors left to throw money on to your unprofitable startup.
| tiffanyh wrote:
| I agree with what you're saying ... but why take venture
| capital then?
|
| They should have raised debt instead.
| enra wrote:
| "Venture debt is like a delicious sandwich that only costs
| ten cents, but occasionally explodes in your face" - PG
|
| Part of being a startup is still that there is not a lot of
| historical precedent and uncertainty how well your business
| will do in the future. The problem with any fundraise is
| that it's always future looking (perhaps maybe you create
| some kind of option structure to call on it if needed).
|
| VCs, especially Tier 1, can be still helpful in different
| ways, and them owning equity aligns the incentives more
| than debt.
| ricokatayama wrote:
| A great piece of advice from Linear. Even in this flourishing AI
| landscape, every startup should avoid being overly speculative
| about resource mgmt. Linear raised from YC and Sequoia though.
| I'd love to learn more about how they balanced their burn rate
| unreal37 wrote:
| No, not in the AI space. Disagree that you can be successful by
| avoiding risk and conserving resources.
| ricokatayama wrote:
| I mean, those wrappers etc.
| codingwagie wrote:
| Alot of startups arent profitable because they are ran by people
| that have prestigious pedigrees, but dont know what theyre
| doing/have no experience. So they blow all kinds of money on bad
| ideas/poor execution, but are still able to raise more funding.
|
| Eventually for some of these companies something clicks, and they
| do get to something of a valuable company.
|
| This is what ZIRP was.
|
| Alot of people dont know that investors are okay with this, they
| have 20 Million to push into a company, and figure that something
| might pop out.
| PaulHoule wrote:
| It's bigger and wider than that. Throughout the 1990s people
| didn't care what anything cost on the web because they figured
| the money would work out someday. There was the 2000s crash but
| the success of Amazon, Google and such proved that the web was
| a great idea.
|
| The story of social media was that there was a narrow time
| window and a single place (other than, recently, China) where
| investors were willing to take a chance that the likes of
| Facebook and Twitter would find a funding model. By the time
| that model was proven, it was too late for new entrants. Thus
| Europe was left high and dry.
| codingwagie wrote:
| Yeah there's a few winners they are hoping for. So they
| pattern match, Jeff Bezos went to Princeton and worked at
| hedge funds, so lets fund everyone that looks like that.
|
| Turns out a bunch of those people are actually lemons, so
| they run a bunch of unprofitable startups.
|
| There's two things going on:
|
| 1. Long term risky bets that could pay off massive
|
| 2. Who is the person they choose to try and execute on the
| above
| unreal37 wrote:
| If all you're doing is building a project management app, yeah
| it's easy to be profitable.
|
| The trick is when you're trying to take risks and innovate. It
| took Amazon a long time to be profitable. It took Uber a long
| time to be profitable. It took Facebook a long time to be
| profitable.
|
| When it's a land grab - when you're racing against other
| companies in a new market like AI - you need to burn money fast
| to run fast. Can't take a year in private beta.
| a-priori wrote:
| You could dismiss almost any company as "if all you're doing is
| building an X app...". It's a no-true-Scotsman argument.
|
| Even setting that aside, not everything is or should be a land
| grab. It's notable that all the examples you provided -- Amazon
| (at least, its initial online store product), Uber, Facebook --
| are all B2C plays and I don't think that's a coincidence.
| enra wrote:
| I tried to ask examples of this yesterday[1], but afaik the
| patterns seems to be think throwing money at the problems
| works in undifferentiated, maybe transactional categories
| like food delivery, ride share, e-commerce etc where the
| software is not the product, it's just the payment method or
| the market place. The market places are also localized so you
| have these countless local turf wars, until you regain some
| kind of dominance or balance. Then deep tech, hardware etc is
| harder where you need large initial investment. Social
| networks because they need the critical mass, and usually
| there isn't a direct business model available.
|
| I'd argue most b2b/enterprise software is a new version of
| something that already exists or addressing a need that
| already has a market. Business model is also very clear,
| there is very little network effects usually other than
| reputation and customer proof. Yet most the startups not even
| close being profitable.
|
| In my mind most software products are differentiated so in
| the end the main success comes from getting the
| differentiation right for the market, not outspending the
| competition.
|
| 1) https://x.com/karrisaarinen/status/1892700146414096549
| garrickvanburen wrote:
| All three of those examples strategically traded profitability
| for marketshare, and at a time when money was very cheap. This
| is what is meant by "prioritize growth over everything else."
|
| That is not today's environment.
|
| When it's the focus, profitability can be easily achieved
| somewhere between day 1 and month 18.
| enra wrote:
| Karri from Linear here.
|
| I wrote this to challenge the common dichotomy that startups are
| either VC-backed money-burning machines or anti-VC/profitably
| bootstrapped. It doesn't have to be that binary. There's a
| spectrum, a middle ground. You can retain control by being
| profitable while still using funding as leverage or as a safety
| net if things don't go as planned.
|
| One of the paradoxes of fundraising is that it's easiest when you
| don't need the money--and almost impossible when you do. By
| keeping the company mostly profitable, you never have to need it,
| giving you full control over timing and the ability to choose the
| right deal. But having that funding can enable you some more
| leverage or add more risk business you could afford while being
| bootstrapped. In our case we raised the funding for the
| conservative case, but the reality turned much better than
| expected.
|
| Another misconception is that sustainable growth comes from
| spending or hiring. In reality, many great products take off
| first and because they take off, any amount of hiring becomes
| justified. Some of these companies are even profitable before
| they go on a hiring spree. The problem is that the typical
| approach isn't nuanced or intentional enough. You might decide to
| hire 100 engineers before knowing how the next 10 engineers
| impact your trajectory. If you cut the hiring plan in half--or
| even to a quarter--it might not affect growth at all. But there's
| often an assumption that growing the team is also good, and maybe
| it comes from a time in the 90s or something when you had hire
| people to man the phones to take orders.
|
| What I believe is that startup's growth is primarily driven by
| product superiority and market fit, not just by headcount or
| marketing spend. Those things can amplify success, and in some
| cases, they can even mask a bad market fit through sheer force of
| sales and marketing.
|
| A less cynical take on VCs is that they're not necessarily
| pushing companies to burn cash they just want founders to double
| down when they see a company working. But whether you can truly
| scale depends on your market dynamics. Sometimes, you need time
| to learn or to land the right deals in a segment before pouring
| money into growth.
|
| The problem is that the current thinking is often too simplistic.
| Since you're startup and have cash, the spending more is always
| the right move. Going all the way 100 when you could dial it down
| to 50 or 30 and regain control and de-risk the changes of
| complete flare out.
| rglover wrote:
| Thank you for writing this and sharing this perspective. It's
| nice to see a quality-focused company winning purely on the
| merits of their product. I've found it deeply frustrating to
| watch what used to be considered "running a business" (building
| profitable products/services) get snubbed in favor of half-
| baked cash furnaces that spin their tires.
|
| Very encouraging to see this. Congrats on achieving
| profitability and staying profitable. Excited to see what the
| Linear crew comes up with next.
| napworth wrote:
| Question for you Karri. If revenue is benchmarked at $500k -
| $1mil per employee, how much salary is each employee expected
| to receive?
| eawgewag wrote:
| I think your point would've been clearer if you clarified up
| front that Linear has taken 50M+ in funding. You would have
| clearly indicated where in the range of middle ground you are
| speaking from.
|
| I know of YC startups that have taken <1M in funding and are
| now profitable. Similarly, the Discord founders (995M+ funding)
| have dropped hints on this very website several times that they
| are now profitable, but they would be laughed out of this room
| if they tried to outright claim that they are a "Profitable
| Startup". To say that Linear's story is comparable to any of
| these is, well, a stretch.
| foliovision wrote:
| Good article but it doesn't fit in with American thinking. In
| search of a unicorn. The only very visible company in the United
| States I can remember following the profitability and measured
| growth path was 37signals. Even they have occasionally wandered
| way off course, with multiple products, and neglecting the main
| product (long discussion). I agree with you. This philosophy of
| profitable growth makes me interested in Linear as a potential
| customer. There's less risk of you closing your doors or just
| selling your smaller users out.
| toasterlovin wrote:
| Interestingly, both 37signals and Linear have non-American
| founders.
| napworth wrote:
| Question. If revenue is benchmarked at $500k - $1mil per
| employee, how much salary is each employee expected to receive?
| garrickvanburen wrote:
| My rule of thumb is $250K/yr employee all in (benefits, the
| opportunity cost of an actual job, etc).
|
| I'm always surprised by multi-person founding teams with no
| path (aka pricing model) to covering their own lifestyle.
|
| https://forstarters.substack.com/p/for-starters-17-at-least-...
| rizs12 wrote:
| I've heard it said that for investors, finding the companies that
| need money is easy. But the real gold is in finding the companies
| that don't
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