Why Tech Startup Margins Matter!
I have this saying that before a Tech Startup builds any code, they need to first analyze and test the market and decide if there is a marketing opportunity. But before they write any code, they also need to get out a spreadsheet and determine if there is financial viability. Tech Startup Margins Matter!
So, when I run into a startup that has the same conundrum we ran into with our Speed Dating business, I recognize it right away.
A Startup Tech company that focused all its energy on developing tech to solve a problem and not on how to make enough revenue to sustain the partner’s bills, can become a rudderless ship. The power of making revenue is the main factor why a startup survives or not. If not revenue then a capital raise. Without capital and money to pay the boys in the band, you can just go out and get a job.
Trust me it is not easy to build Tech and get it out the door, bug free and get hundred, thousands, hundreds of thousands of users. That is a challenge unto itself. But the real truth is you need to make money or create something of value that is worth a lot of money.
There are a couple of stats that they teach you in MBA finance 101 that have to do with liquidity and business health. The main one are Margins. There is gross margin and net margin. Gross simply means revenue minus cost of doing business. The net is the final revenue after all costs, like rent and advertising, legal, phone, salaries and utilities. This is important because you need to know the percentage. That percentage represents what you take home. If you made $350,000 and you ended up with $35,000 at the end of the P&L year, you have a 10% net margin.
There are Tech startups with 80% tech startup margins and Tech startups with 3% margins. You can have a low tech startup margin business, you just need to have a millions in sales to make up for the low margin. What you need to stay away from are low tech startup margin businesses with no way to scale. That is a bad situation and unless you find a way out of this box, you may be boxed in and shut out of profitability. As a rule of thumb, recurring revenue Saas and Membership margins should be in the 40% to 80% range, well at least the gross margins should be 80%. If you are looking at under 10% margins, you should reconsider the business model, especially in a Tech Startup.
Saying that, many Tech Startups work on the premise of no margins, no revenue and good will. That means that they collect data with the hope of finding a buyer of the business or a business model hidden somewhere. Trust me, these are not great situations to be in and highly risky. Best to figure this out now and not after you are in the hole $300k or a million dollars. I know many startups just like this!
So, it took us about a year or two to realize when we founded Pre-Dating the first time that the margins are not great at the HQ. We needed to increase the volume, so we entered over 100 US and Canadian Cities to pump up the volume of speed dating events. Sometimes only at a certain level you need to pass, does the margin change as well. In your analysis of the tech, you need to overcome this point, which they call break-even.
Most entrepreneurs understand all of this. The reason I mention it here is tech guys often don’t get an MBA or have a finance class. And honestly these concepts do not require a finance class in an MBA program, like the one I attended at Florida Atlantic University. Most serial entrepreneurs pick up these concepts right away. And if you want to be a serial entrepreneur you need to figure it all out asap.
When I see the low tech startup margins in a tech startup, I understand right away that there are reasons why typically. Sometimes it is the market they are in. Sometimes it has to do with costs that can not be contained or reduced. What you want to look for is scalability, where the company can grow and grow without restrictions. It’s why Paypal was a brilliant concept. When I refer to business models, this is the heart of the issue. Are you pursuing a business model that can scale?
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