When I first got started, I thought that raising funds was the only path to building a successful company.
I tried to get in touch with as many investors as I could but got rejected each time.
I had no track record and no wealthy “friends and family” to raise from…
On top of it, every investor was telling me that the market I was targeting was way too crowded for me to succeed.
But all these rejection messages were actually a blessing in disguise.
Starting my SaaS company with only $1000 was the best thing that ever happened to me.
5 years and a half later, I managed to:
- grow a profitable SaaS company to $20M in ARR
- grow a SaaS product to $600K and sell it after 18 months
- grow my business to a $150M valuation
- acquire multiple SaaS businesses for multi-million $ deals”
I wanted to explain why a Profit-Led Growth approach is, in my opinion, the best way to grow a SaaS company.
For everyone who might think that I’m saying that because I couldn’t raise funds and I’m just a grumpy French 🥖 who has no clue what running a VC-backed company means, here are a few details:
1- I invested in 10+ companies, and I’ve been on many boards of unprofitable companies that are backed by investors
2- I invested as a Limited Partner (LP) in 3 different VC funds
3- After selling 20% of my company for $30M, I now have a board of investors too
4- I’ve talked to and advised 100+ VC-backed founders in the last 5 years
So overall, I’ve got a good benchmark and understanding of what it looks like to work with a board of investors, to be profitable VS unprofitable, and all the pros and cons that go with it.
But before we dive in into the reasons why I think Profit-Led Growth is the best way to grow a SaaS business, let’s define what it is.
What is profit-led growth?
Profit-Led Growth is a way to grow a business where you focus on profit.
And the reason why you need to focus on profit is because, without it, your business will die.
The Profit-Led Growth mindset is about having a true understanding of the value of money and scaling.
Running a profitable business means that you deliver enough value to people so they pay for your service, and you generate profit on top of it.
It means that the problem you’re solving is painful enough for people to pay the price you currently charge.
It also means that you master the unit economics of a business.
What I mean by that is that you understand that if your pricing is too cheap or if you’re selling at a loss, you won’t ever be able to run a sustainable business and won’t be able to scale.
Profit-Led Growth is not about being cheap and having no ambition… it’s actually the opposite.
Profit gives you leverage.
Because when you’re profitable, you know that you have an infinite lifetime.
Remember, If you do not quit, you will not lose.
And that’s the essence of Profit-Led Growth, putting yourself in a comfortable enough position so you don’t have to quit.
Profit-Led Growth is a movement of people who understand that cash flow and profit equals leverage.
And the more leverage you have in life, the more freedom.
Here are 11 reasons why you should focus on Profit-Led Growth to grow a SaaS company.
1- Tighter product focus
When you raise funding, you have a lot more opportunities because of the money you get.
Essentially, you can invest in many different areas of your business.
But as Biggie said, “No money, no problems.”
Do you know what the best teams do?
They’re laser-focused on solving a specific problem for their ideal customers.
Being profitable forces you to prioritize and fine-tune your product because you know that’s where you’ll get the best ROI long-term.
And that often leads to better market fit and happier customers.
When you raise funds, investors will expect you to spend the money (logic).
They want you to grow as fast as possible so you can raise more funding.
The reason behind it is that every single quarter they report to their limited partners (LPs) about their portfolio.
And overall, they need to show that the investments they made are growing. Their goal is to reassure their own investors and eventually raise another fund later.
And when you raise another round, the valuation of your company officially increases, which is a good sign for investors (even though the valuation at which you raise is usually not correlated with the actual value of your business.)
On top of that, because VC-backed companies are not profitable, they know that they have a deadline before running out of cash.
With that deadline in mind, they know that they will have to raise more to continue growing the way they do.
That’s why when raising funds, there’s a lot of pressure to inflate user numbers for investor pitches. Because without these numbers, you won’t be able to raise another round and your company might go bankrupt.
With the Profit-Led Growth approach, you can focus on truly serving your customers and building deeper relationships.
Profitability gives you the freedom to pivot, experiment, and make decisions based on what’s best for the company rather than what’s best for investors.
Back in 2019, my main product lemlist was growing at 2 digit month over month.
While every investor would have told me to keep focusing 100% on it, I decided to start a side project called lempod.
18 months later, lempod was doing $600k ARR, and I decided to sell it.
During that process, we managed to leverage a multi-product strategy to grow faster, and I also learned the ins and outs of selling a business.
Without doing that, I wouldn’t have been able to make a few multi-million dollar acquisitions in the years following the sale.
4- Psychological Peace
The SaaS business model is the best business model ever created.
You get money upfront, and every single month you get recurring revenue.
This means that when you’re profitable, it’s pretty easy to manage cash flow.
Overall, profitability leads to fewer sleepless nights.
Without the constant pressure to chase the next funding round or hit unrealistic growth targets, you have greater peace of mind.
We often underestimate how draining it can be to run a company.
The amount of time I had chats with founders who would have sold their company for half the price just because they were too tired…
Jason Lemkin sums it up perfectly:
5- Organic Branding
Even though the media tends only to cover startup fundraising, they represent a small percentage of companies.
Profitable companies have authentic stories that resonate with customers, and that helps a lot in organic branding and word-of-mouth marketing.
A really good example of that is Basecamp, their entire strategy is about serving the small and medium businesses.
6- Investor Leverage
If eventually, you do decide to raise funds, being profitable gives you a stronger position in negotiations, potentially leading to better terms.
Back in 2021 no one had ever done and documented publicly a 100% secondary round.
Secondary means that instead of raising funds and getting money to grow your company, you actually sell a part of your shares and get the cash directly in your bank account.
Most VCs don’t want to do it because they want founders to have enough “skin in the game” and they believe that if they give too much money to founders they will not be “hungry” enough to continue growing the company.
I think that it’s actually the opposite.
When I sold 20% of our business for $30M, it put me in a position where technically I didn’t have to work ever again.
This means that I could focus on the only thing that matters… the success of our customers.
Since my business was profitable, I didn’t need more money to keep growing.
So I had a lot of leverage to do a secondary round which no one had documented before.
By doing so, I was able to change the rules of the game and more founder did the same after the article I published, simply because they realize that they had enough leverage to do so.
7- Market Resilience
In the last 18 months, everyone has been talking about the consequences of the current recession.
Some companies have laid off 100s of thousands of people.
It’s getting harder to close deals and acquire new customers.
Every company is tightening their budget…
But in economic downturns, profitable businesses are better positioned to weather the storm, adapt, and even seize new opportunities.
In the next 12 to 24 months, we’re gonna see a lot more Mergers and acquisitions (M&As) and that’s because a lot of companies are gonna run out of cash and will have two options:
1- Sell at a low price
2- Shut down the company
3- Downsize A LOT their team
Options 2 and 3 are obviously the worst situation for a founder and investors.
Usually, they both prefer option 1 so they can get a bit of cash and move on.
That’s where profitable companies have tons of leverage.
When you’re profitable you can acquire companies in many ways.
Either using your equity, getting debt from banks, or using earn outs to mitigate the risk of the acquisition.
8- Acquisition Attractiveness
Profitable companies are more attractive overall because they attract different type of investors.
When you have a proven business model that is generating cash and profit, your value as a company will automatically increase.
9- Enhanced Agility
The Profit-Led Growth approach is all about optimizing the costs and focusing only on high ROI actions.
Because SaaS companies can be run with a lot less people, you usually have a lot more agility.
Twitter is probably the best example.
Elon Musk fired more than 80% of the team and yet, Twitter is generating more revenue than before while adapting very quickly to their customers’ needs.
A profitable model ensures you can quickly adapt to market changes without having to go through tons of meetings and bureaucratic processes just to validate a change in direction.
10- More control
Being profit-led gives you a lot more control.
You can choose or not to raise. You can choose or not to sell.
Rand Fishkin who raised money with his former company Moz eventually had the chance to sell his company to Hubspot.
He was all in to make this deal happen.
But his investors said no because they felt like they could get a higher return later down the road.
In the end, the company didn’t grow as expected and they lost a huge opportunity leaving Rand with nothing…
When you’re in control, you choose when to sell and who to sell to.
11- Financial freedom
“I wish I could increase my salary”
“What do you mean by you “wish you could increase your salary”, you’ve just raised $10M and you’re the CEO”
“Yeah but if I want to increase my salary I need a board approval”
That’s a conversation I had many times with VC backed founders.
You wouldn’t believe the amount of CEOs who are not increasing their salary because they know that their board can either say no or be judgmental…
On top of it, once you get VC money, you’ll never be able to get dividends as well.
Simply because most VCs don’t want profit.
They want more growth and a higher valuation from another round so they can show their LPs (Limited Partners) that their portfolio is growing.
When you’re profitable, you do you.
It’s your own rules and you know that to increase your salary you’ll need to make more money.
Which in my opinion is the healthiest way to align all incentives.
On top of it, when being profitable you also have a lot more leverage to get debt from banks as they will often calculate it based on your EBITDA.
If you’ve read this article until the end it means that you’re somehow convinced that you can do things differently adopting the Profit-Led Growth mindset.
Every week, I dive deep into strategies to grow a profitable SaaS business so make sure to subscribe to the newsletter!
Peace, love & Profit! 💰