Attention to Costs in a Startup

Startups are mainly about revenue growth. You start at zero and build from there.

It is ridiculous to talk about the profitability of an early startup’s financials. Revenue growth is what matters most. Revenue solves all problems in a startup.

That’s one of the biggest attractions for people to work in startups. It’s all about building. It’s not about little tweaks. It’s about construction and growth.

I always find it interesting to see how many of the companies filing S-1’s have had consistent revenue growth and consistently lose money year-after-year (e.g. David Cumming’s post last night). No one cares about profitability, even for companies on the verge of IPO.

People do care about revenue size and the potential for eventual profitability once the growth slows down. At some point, these firms will stop growing and will cut costs so that they are wonderfully profitable for their owners. But early on the companies only care about revenue growth.

My co-founders and I have often discussed how much attention we should give to costs. It takes time and resources to avoid costs. There are diminishing returns with cost cutting (e.g. 80% of costs can be cut with 20% of effort and the remaining 20% of costs take 80% of the effort).

Generalized, any analysis of worst case scenarios can be time-consuming. Yet people are naturally curious and devote attention to worst case scenarios, often more than is warranted.

My advice is to pay attention enough to costs so that you avoid trouble. But avoid spending mental resources on cost cutting and worst case scenarios to the point of believing that those things actually matter. If you start believing your time in those endeavors really matters, then you’re co-opting parts of your brain that should be fully committed to revenue generation activities.

Just don’t run out of cash 🙂

How do you think about attention to costs in a startup?