The Profitable Startup
linear.app
linear.app
I wrote this to challenge the common dichotomy that startups are either VC-backed money-burning machines or anti-VC/profitably bootstrapped. It doesn’t have to be that binary. There’s a spectrum, a middle ground. You can retain control by being profitable while still using funding as leverage or as a safety net if things don’t go as planned.
One of the paradoxes of fundraising is that it’s easiest when you don’t need the money—and almost impossible when you do. By keeping the company mostly profitable, you never have to need it, giving you full control over timing and the ability to choose the right deal. But having that funding can enable you some more leverage or add more risk business you could afford while being bootstrapped. In our case we raised the funding for the conservative case, but the reality turned much better than expected.
Another misconception is that sustainable growth comes from spending or hiring. In reality, many great products take off first and because they take off, any amount of hiring becomes justified. Some of these companies are even profitable before they go on a hiring spree. The problem is that the typical approach isn’t nuanced or intentional enough. You might decide to hire 100 engineers before knowing how the next 10 engineers impact your trajectory. If you cut the hiring plan in half—or even to a quarter—it might not affect growth at all. But there’s often an assumption that growing the team is also good, and maybe it comes from a time in the 90s or something when you had hire people to man the phones to take orders.
What I believe is that startup’s growth is primarily driven by product superiority and market fit, not just by headcount or marketing spend. Those things can amplify success, and in some cases, they can even mask a bad market fit through sheer force of sales and marketing.
A less cynical take on VCs is that they’re not necessarily pushing companies to burn cash they just want founders to double down when they see a company working. But whether you can truly scale depends on your market dynamics. Sometimes, you need time to learn or to land the right deals in a segment before pouring money into growth.
The problem is that the current thinking is often too simplistic. Since you're startup and have cash, the spending more is always the right move. Going all the way 100 when you could dial it down to 50 or 30 and regain control and de-risk the changes of complete flare out.
I know of YC startups that have taken <1M in funding and are now profitable. Similarly, the Discord founders (995M+ funding) have dropped hints on this very website several times that they are now profitable, but they would be laughed out of this room if they tried to outright claim that they are a "Profitable Startup". To say that Linear's story is comparable to any of these is, well, a stretch.
Very encouraging to see this. Congrats on achieving profitability and staying profitable. Excited to see what the Linear crew comes up with next.
Linear has raised over $50M+ (at $400MM valuation)
You just can't grow fast enough while being profitable - to grow into & surpass that kind of valuation ... in a timeframe ok that's for your investors.
https://tracxn.com/d/companies/linear/__xC97n-jdX7VZjDBpNyRf...
Thanks for this source
You know what? Good, and hopefully Linear sets the example instead of the others just running back to VCs again for another top-up.
Once you have shown that you're profitable, then you don't need them. The moment you do, you're always having to cede control and be at their mercy after raising and burning ridiculous amounts of their money and losing parts of your business.
Of course VCs see that as an issue as they feed on startups by doing this. If you're profitable then you don't need them.
Otherwise, you'll be on your Series Z until there are no more investors left to throw money on to your unprofitable startup.
They should have raised debt instead.
Part of being a startup is still that there is not a lot of historical precedent and uncertainty how well your business will do in the future. The problem with any fundraise is that it's always future looking (perhaps maybe you create some kind of option structure to call on it if needed).
VCs, especially Tier 1, can be still helpful in different ways, and them owning equity aligns the incentives more than debt.
Linear raised its A during the 2020-2021 frenzy and its Series B when every VC was telling their portfolio companies to reduce burn and get a 4-5 year runway. They created a profitable business in between.
They get to do every single thing exactly how they want to until they raise again (if they ever do).
Part of this post is to debunk the myth that can be VC backed startup, be profitable and grow fast at the same time. VCs are quite keen in this approach too.
It's not required of the founder to sell the company cheaply to investors, even though the investors would of course quite like that.
If your market is having a hockey stick growth because it's new or in vogue, even underperforming teams will outgrow the best team in the world stuck in a linear growth market.
So I chuckle a bit when founders try to convince you that they are the reason for the hockey stick, or that they are the reason for the linear growth. You're riding the wave more than anything. The main difference then being if you end up being the one chosen by Softbank to aggregate the market or if you'll be one of the ones that are bought out by them.
A good recent lesson in the awesome power of network effects is X. A huge number of users on that platform hate the direction Elon -- and it -- have taken, but they still use it. Major brands still use it. Governments targeted by people Elon is amplifying use it. Journalists who hate it use it. Why? People use it because people use it, and it's hard to get everyone to migrate at once.
Network effects are a force of nature. They are the strongest possible lock-in.
Eventually for some of these companies something clicks, and they do get to something of a valuable company.
This is what ZIRP was.
Alot of people dont know that investors are okay with this, they have 20 Million to push into a company, and figure that something might pop out.
The story of social media was that there was a narrow time window and a single place (other than, recently, China) where investors were willing to take a chance that the likes of Facebook and Twitter would find a funding model. By the time that model was proven, it was too late for new entrants. Thus Europe was left high and dry.
Turns out a bunch of those people are actually lemons, so they run a bunch of unprofitable startups.
There's two things going on:
1. Long term risky bets that could pay off massive
2. Who is the person they choose to try and execute on the above
Yeah. And a lot of people still doesn't seem to have waken up to the fact that ZIRP is dead. So no infinite amounts of cash in the economy to blow on unprofitable 'growth' startups anymore.
Everything will need to change.
VC's don't care about mediocre successes. They want couple of huge exits, and if the rest go bankrupt, they don't give a shit. That's the VC business model and all the great company-building "advice" they give, is actually just crafted to generate profits to them, not really to make sense for the founders or other stakeholders.
yes, exactly. what they want is what they (used to) call ten-baggers. meaning 10x their investment, prolly, I don't remember the exact meaning.
I said "used to", because that is from sometime ago, before the fuckheaded idea of so-called unicorns.
nowadays they want a million times their investment.
This is also something DHH has been saying for years. However, I think it is more true now than ever. With how easy it is to start and scale a software company I really struggle to understand the justification for venture funding at the earliest stage, unless you want to larp as a founder, have low conviction, or just want “the experience”.
Most obvious one is you’re building something actually technically challenging and need to grow your team to get there. People, especially great people, are bloody expensive. No way to afford any reasonable headcount as a 22yo first time founder without venture money.
Of course, simple ideas are easy and need less resources and might be bootstrapped, hard ideas less so.
What is an example of a not simple idea pure software play that would require VC funding at the earliest stage?
The trick is when you're trying to take risks and innovate. It took Amazon a long time to be profitable. It took Uber a long time to be profitable. It took Facebook a long time to be profitable.
When it's a land grab - when you're racing against other companies in a new market like AI - you need to burn money fast to run fast. Can't take a year in private beta.
Even setting that aside, not everything is or should be a land grab. It's notable that all the examples you provided — Amazon (at least, its initial online store product), Uber, Facebook — are all B2C plays and I don't think that's a coincidence.
I'd argue most b2b/enterprise software is a new version of something that already exists or addressing a need that already has a market. Business model is also very clear, there is very little network effects usually other than reputation and customer proof. Yet most the startups not even close being profitable.
In my mind most software products are differentiated so in the end the main success comes from getting the differentiation right for the market, not outspending the competition.
That is not today's environment.
When it's the focus, profitability can be easily achieved somewhere between day 1 and month 18.
I'm always surprised by multi-person founding teams with no path (aka pricing model) to covering their own lifestyle.
https://forstarters.substack.com/p/for-starters-17-at-least-...
But it's hard to be a profitable, bootstrapped startup when rocket fueled / venture-backed startups are too busy growth hacking and venture-funded blitzscaling to capture customers at low cost to the customer, only later to screw the customer when it comes time to either flip the company to a buyer in order to return those VC dollars, or to turn the screws on the customers and enshittify the product when blitzscaling is no longer feasible.
Personally, I prefer a bootstrapped, profitable startup in markets where blitzscaling venture-backed rockets aren't raiding the customers.