What does it take to become a successful entrepreneur today? If you were to take advice from the “gurus” of Silicon Valley, it would involve pitching a great idea, securing lucrative venture capital, scaling your business as fast as possible, getting an outsized valuation, and cashing in on a huge payday. Pitch, fund, scale, sell and repeat. In the age of “Shark Tank,” where venture capitalists have become the new superstars, we’ve seen the culture surrounding entrepreneurship shift from building sustainable, profitable companies over time to obsessing over funding rounds and “blitzscaling.” This is all in the service of creating massive paydays for investors and founders, even if it negatively affects overall profitability.
This view of entrepreneurship isn’t healthy for would-be business owners or society as a whole. As tech founder Tim O’Reilly recently argued, the current VC “blitzscaling” mentality where only a select few companies hit the jackpot and the rest are left to fail, means that “businesses that would once have made meaningful contributions to our economy are not funded, or are starved of further investment.” However, we’re finally seeing the tides change. A recent New York Times article profiled a growing group of founders and business owners that are rejecting the current VC model and going about business in the “conventional method”—growing steadily, profitably, and most importantly, on their own terms.
At my company Creative Business, a business and financial advisory firm for creative entrepreneurs, we work with many business owners that face this issue. While all companies must grow to succeed, the question of how you grow is the fundamental challenge. Although every company is unique, we’ve discovered that the most successful and sustainable companies share the same principles when it comes to business:
Growth is important, but not in the sacrifice of profitability.
The proliferation of high-profile unicorns that have dominated business headlines over the last decade have put too much emphasis on top-line revenue as their measure of success. Entrepreneurs have now been conditioned to project overly optimistic “hockey stick” revenue curves. The truth is that only a tiny percentage of businesses will actually achieve this kind of growth, and many of the ones that do end up operating at huge losses.
In the end, businesses need to be profitable to succeed in the long term. Some early stage companies may temporarily operate at a loss as they invest in infrastructure or marketing and sales. However, this loss needs to be carefully budgeted and articulated in the strategic plan. As a business owner, you and your investors will need to know the break-even point in addition to the projected profitability.
Businesses focused on profitability should aim for a 20% profit margin and positive cash flow in their strategic budgets. This helps to build a buffer in your projections that allows for breathing room in case you miss your sales targets. When it comes to healthy growth rates, it’s anything but a hockey stick. Even extremely successful companies, which may see 50-100% year-over-year revenue increases in their early years, will eventually level off. Our experience is that companies in expansion mode should aim for 25-30% yearly growth, and any double-digit growth is favorable for mature companies.
You can be profitable and still be good to your employees, community and society.
Profitability does not have to come at the expense of lowering employee wages, cutting corners or making unethical decisions. The idea that the sole responsibility of a business is to maximize shareholder profits is not only outdated, it’s detrimental to society. Even those in the top 1% have acknowledged the issues surrounding shareholder capitalism, which has exacerbated economic, social and environmental issues around the world. Recently Larry Fink of investment firm BlackRock called on businesses to put purpose before profits, stating that “companies that fulfill their purpose and responsibilities to stakeholders reap rewards over the long-term.” Research substantiates this concept: companies that put employees first and prioritize stakeholders over shareholders perform better over time. The goal isn’t just to maximize short-term profits, but to create long-term value by investing in employees and the community.
As a prime example, Michael Lastoria, founder of fast-casual restaurant & pizza, shocked initial investors by promising to use fresh ingredients while also paying his workers at least $ 15 an hour, more than 50% higher than the minimum wage at that time. The restaurant industry did not believe he could survive. Not only was he able to prove skeptics wrong, but he has since expanded to 33 locations and began a movement to increase the federal minimum wage to $ 15. Could he make more money by lowering wages and buying cheaper ingredients? Sure, in the short term. But his commitment to fair wages and honest food cultivated a large and loyal following.
Your own success is not measured by your net worth, but by leading and living a meaningful life.
Although the exact number varies depending on location and cost of living, studies around the world all come to the same conclusion: more money makes you happy, but only up to a point. After that, your satisfaction doesn’t increase with income. In some cases, it even decreases the more you make. In North America, this number sits at $ 105,000 USD.
Where does happiness and life satisfaction come from after that point? By living a meaningful and purposeful life. What “meaningful” means to you is highly personal, but psychologists have generalized a meaningful life as using “your highest strengths and talents to belong to and serve something you believe is larger than the self.”
We are incredibly lucky that our clients are primarily creative entrepreneurs who are driven by a passion for their craft and hope to use it to make an positive impact on the world. But you don’t have to be a “creative” entrepreneur to be a meaningful one. As a business owner, you can always make an impact within your organization and outside of it. For us, success as an entrepreneur is simple—make enough money for yourself to make a good living, save for the future, and invest. Make enough to give your employees fair wages, benefits, and job security; and make enough to be able to give back to the community or make a positive impact on society. Everything else is just a number!
Originally published here.