New Venture Time to Profitability

In talking with first-time entrepreneurs I consistently find they optimistically believe they’ll hit profitability six months after launching their product. In my experience, with a couple different ventures, I’ve found that profitability comes a full two years after starting the venture. Let’s look at the timeline I’ve experienced two times before:

  • Six months building the product with a key potential customer providing feedback throughout
  • Three months working with a handful of non-paying beta customers
  • Three months of selling to get the first couple customers
  • A year of selling to refine product market fit, customer acquisition model, on boarding process, and at the end, achieving ramen profitable

So, in my experience, the end of year two is when we finally have several hundred thousand in annualized revenue and typically have enough to cover our expenses assuming we’re paying below market salaries.

For entrepreneurs that are bootstrapping a product company, I recommend having two years worth of living expenses on hand when starting the business — it often takes longer than expected to reach profitability.

7 thoughts on “New Venture Time to Profitability

  1. Yep, in my experience as well those estimates are right on for a technology product company. I would only add that services companies reach profitability much more quickly, for the simple reason that there’s no product to develop, just a sales and marketing strategy & collateral (which does take some time, but not nearly as much.) The downside of services companies is that they’re not as scalable.

  2. Thanks Jared. Great point that services company reach profitability sooner, if not almost immediately depending on the sales cycle and pipeline in place when the business is started.

  3. Great advice. The first year is always harder then you can ever imagine getting the business set up and then the second year is really your first true year. Entrepreneurs often dont accurately anticipat. How grueling the first two to three years can be. Personally, I think it is important to not skim on bringing in the best quality team at this point as this can potentially make or break the business. Don’t skimp on recruiting the best as this many tmrw is the different from ramen success and creating a business that has massive equity value for you and the early tream. Get everyon invested and reduce your costs and caliber of recruits this way. Best of luck!

  4. David,

    You mention “paying below market salaries” in your post, and I think this is in part what Dave Williams was referring to in his reply.

    Does this mean you supplemented salary with equity in early days? If so, what is your preference for structuring equity and how did you decide what the pool size would be?

    If you didn’t give up equity, what was your strategy to recruit A level talent?

    Thanks.

    • My strategy is different from Dave’s. I typically looked for the unproven person that had great potential and then grew their salary to be well above average in a few years.

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