Defining a Successful Business

People constantly throw around the term “successful business” or “successful startup”, but I bet if you ask 10 entrepreneurs how they define success, you’ll get 10 different answers. I typically like to ask the following question: how do you define success? Here’s how I define a successful business:

  • $1 million+ in annual gross margin (difference between the sales and the cost of goods)
  • Sufficient redundancy and scale such that anyone in the business can go on vacation for two weeks and everything continues to run fine
  • Reasonable revenue predictability (recurring revenue is best) such that sales can be predicted out on a quarterly basis with 75% confidence
  • Profitable enough to make decisions on growth, lifestyle, etc

Notice that I didn’t say it had to be a technology business, or potential for 30% net margins (even though that would be nice), or 50% year-over-year growth. I think those are all nice, and important to me, but for most entrepreneurs I’ve talked to, they are looking for a level of scale, stability, predictability, and freedom (profits!).

How do you define success?

19 thoughts on “Defining a Successful Business

  1. David —

    Good post as usual. The key is what is success for you? VC backed companies have one measure (Fred Wilson just wrote a nice piece on this here: http://www.avc.com/a_vc/2010/03/being-fat-is-not-healthy.html) while other entrepreneurs might agree with your points above. Most of the entrepreneurs I have talked to over the years, literally hundreds if not thousands, by and large think that raising large sums of capital and deploying it at break neck speed is glamorous. Maybe, but is hard work with a lot of downside risk. Your model, while maybe not the home run by some standards, certainly merits pondering. I would take a $1MM a year in margin without playing with Other People’s Money anyday…

    Thanks for the daily post…

  2. Thanks Jamie. I agree that too many entrepreneurs think that raising money equals success, which is far from the truth. I encourage entrepreneurs to consider the slow and steady route, with profits, vs the “go big or go home” strategy.

  3. I think one key aspect of success for a new business (technology based or not) is that they survive. Statistically 9 out of 10 new businesses fail within the first 5 years, and the majority of them fail within the first 2 years. Raising a lot of early money (classic way to launch a tech company) actually doesn’t seem to change those 5 year statistics much. So longevity I think is part of the definition of success. And selling your company for more than you put into it before 5 years is still successful of course – so longevity isn’t necessary, but it is indicative of success and something a entrepreneur/business owner should be able to point to as a sign of their success.

    • Thanks Raghu. That’s a great point that just surviving is an accomplishment by many measures. Most people probably don’t realize how few businesses last five years.

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