Recently I was discussing with an entrepreneur an interesting question: how much profit should be reinvested in a successful startup? Of course, if there are VCs or institutional investors, the answer is all of it as the focus is to get as big as possible as fast as possible. Now for bootstrapped startups and some angel-backed startups, once the startup is profitable it’s up to the co-founders to decide how much profit to reinvest in the business.
If the startup is growing fast, ideally all the profit would be reinvested. Here’s a simple formula I like to use:
Pay yourself 25% more than your lifestyle calls for until you have two years of savings then just pay the minimum to maintain your lifestyle
The idea is that there’s some peace of mind for having sufficient personal savings while at the same time maximizing the investment in the fast growing startup.
What else? How do you determine how much profit should be reinvested in a startup?