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Ideas. Insights. Inspiration.

When did profitability become optional?

I've been thinking a lot about whether I should start my own business recently.

After all, business has always been a passion for me. It's what I went to school to study -- twice, actually -- and I've picked up a thing or two while working with some of the best brands in the world over the past 20 years.

At least... I thought I had. Because all of my studies and training led me to believe that a successful business has to be profitable, and it seems that's no longer a requirement.

Mattress-maker "unicorn" Casper recently filed the paperwork necessary to go public. And the numbers they revealed as part of the process... aren't very good.

I can't sum it up better than this insightful tweet from Derek Thompson, a writer for "The Atlantic", so I won't even try:

Now be honest: if I came to you asking you to invest in my business, and I said, "We have a history of losses and expect to have operating losses and negative cash flow as we continue to expand our business"... would you give me a dime? Probably not. But that sentence is straight from Casper's IPO filing, where they're asking investors for a whole lot of dimes.

Yes, most companies are unprofitable in their early stages; they have start-costs they need to incur just to open their doors, but may not yet have any customers or revenues to cover those costs. I get it. But common sense would dictate they should have a plan for profit at some point. Amazon famously appeared to lose money for years (and years), but we now know founder Jeff Bezos was taking the company's profits and reinvesting them into the business to create what Professor Scott Galloway would refer to as "moats". And if you've had a look at Amazon's stock chart lately, it's tough to argue that wasn't the right thing to do.

This doesn't seem to be the case with Casper, however. They're not losing money because they're building moats to protect their core business; their core business model is fundamentally flawed. They lose money on every single transaction, and as a mentor of mine liked to say, "when you lose money on every sale, the last thing you want is volume."

To ever achieve profitability, Casper would need some combination of higher prices (which makes the products less attractive relative to competitors and could impact the number of units they sell), fewer returns (which, if the policy changes, increases the trial-barrier for customers unsure of the start-up's product quality), or reduced marketing spend (which means less brand awareness and customer acquisition). None of those are attractive options. But neither is losing money on every sale.

It's fairly common knowledge that most start-ups don't place much value on those with MBAs. But... perhaps they should.

After all, MBA graduates have all had to take some version of "Introduction to Finance."

- dp


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