Discover more from Margins by Ranjan Roy and Can Duruk
Please Make Money.
It's the right thing.
Hi. Can hear for you. Sorry, I meant here…Today, we talk profits.
Gordon, is that You?
In my job search, one red flag I’ve learned to look for is an unwillingness to make money. Unsurprisingly, it’s quite common here in Silicon Valley, to meet companies that are merely uninterested in making money. The most common culprit, of course, is the obscene amount of VC funding companies can and do raise. It is, for lack of a better word, horrifying.
It’s less of a distaste but rather a lack of hunger for money. Whenever I hear a company is not interested in making money but rather really “exploring the problem space” or “want to make the world a better place,” all I hear is flailing arms, without a purpose. The “we are acquired by a big firm and can now focus on what we really want to do,” to me, sounds like bad decisions accumulating over time. I wish more companies just came out and said that they wanted to make money.
Now, I know it can sound a bit Gordon Gekko-ish to judge companies by their sheer desire to turn profits, but let me explain.
In short, profits keep you focused. Not just on profits themselves; just your business. You hear “focus” as a piece of business advice often. In fact, you hear it so often that it’s nauseating. Steve Jobs is famous for telling Nike to cut the crappy stuff. Wonks at McKinsey start their presentations with “Focus on your core competencies” built-in to their templates. Yet most people fail at this. It is hard to focus. The allure of doing side-hustles, doing anything other than what you should be doing prove too strong for us mere mortals.
Yet, if you just focus on turning profits, again at least at some point, you’ll invariably focus. Without the lens of wanting to make money, everything looks the same. You can’t tell whether you should do this, or that, if you don’t have a scale to judge things by. For example, if your side hustle seems like a better way to make money than what you are doing 9 to 5, you should probably do that instead. Because otherwise, you are either leaving money on the table or there will be someone else who will do that night-time gig better than you, because they will be focused on doing that, and that only.
Moreover, if you really want to explore doing exciting things, you would instead make money first so that you will have the freedom to do what you want. Google can throw billions of dollars on interesting projects, like, say, engineered flies, because they do make a ton of money. In fact, their core business of search is so efficient that they measure the cost of doing millions of search queries in mere cents.
The Receivables Man Cometh
There are probably better ways to phrase this than “profits make you free,” but lack of profits invariably makes you beholden to who is currently paying your bills. They might be looking the other way right now, but rest assured, when their lenders come a-knocking, they will be breathing down your neck as well too.
Look, I realize how I sound. But I can tell you when a company doesn’t want to make money and have no tangible, real plans to do so, they make bad decisions that will only haunt them down the line. I can tell you, the people who have to bear the biggest brunt of those mistakes are rarely the executives, but instead the people who are down the food chain.
I worked at multiple places where making money was less of a concern since we had a lot of funding. We thought, or at least other people up the chain did, money would always be aplenty, and the industries we were in were big enough to handle pivots and make mistakes. We built interesting things, some of which were well ahead of their times. We also developed a lot of vanity projects that someone really enjoyed working on, which didn’t add up to much. We looked, as one does, at vanity metrics that seemed to go up and to the right, but didn’t really advance anyone’s agenda other than that of our users, who enjoyed not paying us. It did not work out.
And that is really the point. If the most common business advice is “focus,” maybe the second most common is a derivative of that, which is “focus on your customers.” That is great. Of course, people should focus on customers, yet, I can tell you, if you asked most of your customers, the most common demand would be to pay you less and get more. In fact, if you could find a way to charge them nothing at all, that’d be best. “Customers first” is a good and noble goal, but it doesn’t mean “business last.”
You cannot serve your customers in the long run if you never make money. Building businesses that your users come to rely on, fostering a community, and then pulling the rug under them when the money dries out is not putting customers first. You sometimes hear, for example, that “user experience” is not just the designer’s job. That is true. But is there a more fundamental user experience gaffe than, say, one day shutting down the app while you make out with your millions of dollars? Allowing people to download their data from your service, which 99.9% of your users won’t bother, and of that 0.01 % that do can’t do anything with, is not putting your customers first. That is you making your conscience feel better.
There are two times, “putting the customer first” is a competitive advantage. The first is obvious: when there is competition. All things being equal, your customers flock to you while they get better treatment, better terms, more pats on their backs. But also, somewhat ironically, another time when you can drop everything and just focus on your customers is when you actually do not have to worry about the competition.
That is, if you are so cash-rich, say, thanks to the VC funding that fuels your business in perpetuity, you can focus on your customers and customers only. However, as we are all learning in the public markets recently, without an actual business that has margins (hey!), that strategy goes only so far. I mean, you can probably get a nice payout for yourself by taking money off the table, but it’s hardly socially optimal.
VCs, Welcome to The Margins
Part of why this discussion sounds insane to me, that “businesses should aim to make money” is a bit of actual advice now. We really let things get out of hand. Let me say this outright: VC funding is a valid way to form businesses. Historically, the idea is that there’s more money to be made tomorrow than there is today, but you are simply cash-constrained today.
A better way to look at is “risk capital.” It’s possible, for example, your idea simply requires a decent amount of work to come to fruition, and you need to pay people to help you do it. Your lenders might not be convinced, but you can sell some of your equity for your future returns. The other way venture capital generally worked is winner-take-all markets, where spending a bit to buy market share will give you some pricing power later. That might sound a bit monopolistic, but it can also mean that the only way a new company that isn’t endowed with the cash-flows of a big company can fight against is a temporary cash infusion from an external source. It’s somewhat akin to patents, where you press your thumb on the scales for a short time to let the small players have a chance.
Where things go haywire is “growth capital,” where companies raise money not to validate their ideas in the marketplace, but simply “grow,” regardless of the business itself. This idea flows from the second way I mentioned about venture capital, where buying market share in the hopes of acquiring pricing power, where you can increase prices without worrying about losing the shares later when there’s no competition to be found.
Again, the monopolistic angle is problematic, but that’s not the concern of investors. One would hope someone has a plan for that. Regardless whether investors would ever consider monopolies bad on social grounds, it turns out some of those said-monopolies end up hurting them financially as well. Regardless, the point is you ideally pour in growth capital after there’s a business, not before. You add fuel to the fire when there’s fire, not when all you have is -lighter fluid-soaked kindling. It might make it more and more volatile as you add fuel, but when it burns, you might be burning the entire place down. Without profits, it’s all a show. And, the show will not go on, as the markets have proven.
Profits are Good, but not Everything
And maybe, another caveat to this “profits are good actually” is that we do not have to run our entire society on profit-driven enterprises. For example, we more or less know the markets do not function well in places like healthcare where you can’t do risk-pooling effectively without some intervention. Moreover, you don’t hear it often in the tech world, and there are segmentation issues here probably, but in the home of the brave and the land of the free, the actual rate of people starting businesses is fast declining. I don’t know the answer, but my guess is it’s related to how not being able to have your basic needs taken care of makes you less likely to take risks.
You can decide not to turn profits today. That is fine. What you can’t do, however, is to lie to yourself and people around about not ever wanting to make money. At some point, you will have to, and when that time comes, when you are deep down in debt and payable, you’ll find yourself doing things that you wish you’d not be doing.
That might range from dotting your noble journalistic endeavor with chum boxes from top to bottom. Or it might mean that all the user data you’ve collected over the years that you promised yourself you’d never sell becomes one of your most significant assets. Worst, it might mean that you’ll have to let go of people who you’ve hired with such great expectations. All of those are, in my book, much more unethical things than telling yourself that you are in whatever you are to make money and also work on something interesting. I don’t know about greed. But profits are good.
What I’m Reading
What Statistics Can and Can’t Tell Us About Ourselves — Sometimes the more data you have, the less you know. Statistics estimates population from a sample, but doesn’t tell you why. A bit hand-wavy in places if you know statistics, but still, enjoyable.
All Revenue is Not Created Equal: The Keys to the 10X Revenue Club — Speaking of making money…
The Hedge Fund Billionaire’s Guide to Buying Your Kids a Better Shot at Not Just One Elite College, but Lots of Them — Not really about college admissions, but a beautifully written profile of DE Shaw, the founder of the eponymous hedge fund. Every single person I know who worked (or still works) at his firms have been…characters and I get it now.
And to finish it off:
One of my life goals is to bike on the Atlantic Road in Norway. While reading about it one night, I ran into this amazing video. Norwegian government really wants to tie those islands together and the lengths they are willing to go are extreme.