Economically impactful businesses are profitable businesses and entrepreneurs’ first objective from executing on a startup app idea is to build a business that makes money. Here are 3 ways to ensure a return on investment in your startup app idea.
A business is created to generate a profit. Economically impactful businesses are profitable businesses and entrepreneurs’ first objective from executing on a startup app idea is to build a business that makes money. Here are 3 ways to ensure a return on investment in your startup app idea.
1. Treat It As A Small Business
Imagine if every restaurant in the world could sell to anyone online. Will the increase in the total available market (number of buyers) compensate for the increase in competition? The answer is clearly NO because the buyer will now be looking for the best options from a much bigger pool of sellers. If you’re not one of the best, your business will fail.
According to a survey conducted by Toast, new restaurants generate on average around $111,000 in monthly revenue in the first year of business. While the average profit margin in the restaurant business is less than 5%, the revenue amount is still remarkable when evaluated from a technology startup standpoint. Imagine the valuation investors would put on a startup that generates over one million dollars in annual recurring revenue just the first year of business.
Scalability is the biggest differentiator between small businesses and startups. Unlike small businesses, the business model of startups is repeatable and scalable which, in simple terms, means anyone can pay, use and benefit from the product anywhere 24/7. This is all made possible thanks to technology which is why most software companies have over 80% in gross margin.
Finding a repeatable and scalable business model is not an easy task. If you want to start a restaurant, even if you have never started a business, you can follow clear and predictable steps from other restaurant owners to build a profitable business. Startups, on the other hand, require time and several tests, iterations and likely complete changes of the idea in order to get to market and close the first paying users. Even then, there’s no guarantee the business model will continue to address user needs at scale.
The simplest way to ensure a return on investment in your startup app idea early on is to start it as if you are building a small business. More specifically, instead of focusing on what you need to build to make the product self-sustainable and fully automated, have the initial stages of the venture depend less on technology and more on your involvement almost as if you are a service provider or a chef to continue with our restaurant example.
The trick is to automate progressively. Most startup founders rush into app development to eventually realize that many of the features and hypotheses are rejected. One of the simplest ways to minimize startup risk, stretch an investment and essentially treat a startup as a small business is by taking the role of the product initially and automating progressively.
Basecamp is a multi-million dollar startup that started as a small business, built internal tools to better serve their customers and then slowly and steadily released those tools until what they created became fully sustainable and scalable. The company is bootstrapped and has always been profitable.
2. Find Your Tribe
Most well managed small businesses are profitable despite their limited geographic reach when compared to technology startups. For instance, a restaurant may be serving a few hundred customers that live within a five-mile radius. The interesting part is how a small business can thrive with just a few hundred customers despite the slim margins.
The lesson here is, startups don’t need thousands of users to build a profitable business even more for their high margins. In other words, a startup doesn’t necessarily need to start by building a product that can serve thousands of people when it can release a version that makes money soon even if it relies heavily on founders’ involvement.
You can build a profitable and sustainable startup with just 100 customers that urgently need your solution and love your product instead of thousands that kind of feel it can help them. And if things don’t work out, at least you got paid to learn and can make changes sooner based on an experience rather than a failed launch.
3. Pay Yourself
Many startup founders end up making less than their employees. When a bootstrapped founder prioritizes growth by investing revenue to hire more people while delaying their compensation until later stages, if the business fails, their return disappears. While it’s important sometimes to delay gratification, make sure at least to set yearly distribution targets for a well-done job.
Lastly, keep in mind that for every five startup exits that make the news, there is probably one hundred more that get acquired without any public announcements. This is to note that competitors and investment companies are always looking for the next healthy businesses. You don’t need a billion startup to exit. But if there’s a billion dollar potential, go for it.
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