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It’s the profit, stupid

By - Ibushak


Adrián Fernandez de Mendoza By Adrián Fernandez de Mendoza | Co-Founder - Tue, 03/07/2023 - 17:00

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After the expected but undesirable delay of take-off at the crowded Mexico City Airport, we finally landed in Veracruz. A warm breeze welcomed us and set the tone for the day. We would meet two important suppliers: one for power tools, the other for gaming computers in order to grow their catalog and total sales through e-commerce in Mercado Libre, Amazon and the like. Ibushak is a well-established player in the world of “Full Commerce” and  facilitates online sales through all the major marketplaces in Mexico, including inventory management. As a newly minted Co-Founder in Ibushak, I was excited to listen, learn and potentially contribute.

I have had my share of interesting and relevant positions in the corporate world for almost 25 years (don’t do the math, I started very young). I am also a partner in a venture capital fund (Zero Bullshit - 0bs.mx — check it out), where I see many pitches from many startups with many great ideas. I was extremely confident that I could decipher the business model, economics and potential opportunities of these two small companies. “I got this,” I said to myself. 

But something special happened in Veracruz. 

After meeting Mr. Gaming Computers and breaking the ice with some small talk, he went right for the throat and stated very clearly, while we were discussing the growth of the industry and different competitors: “Top-line sales is just dumb ego. Why would I want to sell a billion pesos if I make nothing in profit? It is just stupid.” 

At that moment, I recalled several times when I was holding a functional role (marketing, for example) and my only obsession was to spend the approved budget to find new customers and ultimately reach my individual goals. Was I ever linked to margin or even had visibility on how my actions impacted the overall return of the business? I think for a long time, I didn’t even know or care about margins. I felt appalled.

We continued the conversation talking about volumes, products and delivery times. I barely followed the conversation since this hardly “new” revelation recalibrated the way I thought about many businesses, and my contributions in the past. 

As we headed to the other meeting, I felt this thought was unique and most likely not common among  all business owners. We got to the warehouse on the other side of the city that hosted hundreds of different tools, some I could not even identify. “We only look for profit-making items to add to our portfolio,” Mr. Power Tools said when we discussed expanding the product line. “I understand it takes some time for a product to be positioned correctly in the marketplace, but we avoid very-low margin products because any hiccup, and you lose money.” 

It seems too obvious but I was baffled to recall that myself and big parts of the organization had not paid enough attention to profit and margins. Was profit-making discipline a must for traditional and “boring” businesses but not for “flashy” startups?

“Good businesses generate missions to drive their profits. Great businesses generate profits to drive their missions,” Tony Hsieh, CEO of Zappos, once said. I can’t believe how this quote is not more popular either on VC missions, founder pitches or in business schools.

Back in 2021, we saw a market crash both for established companies as well as startups. It is hard to point fingers to a single cause for this, but we saw an unhealthy push for growing customer numbers at whatever cost. Narrowing it to new startups, this push was mostly fueled by hungry VCs and founders chasing valuations and unicorn status, instead of paying attention to the basics. We know now that it was a perverse game that led to major crashes and even startups closing their operations. Big hangover for VCs, companies and the ecosystem in general.

But we learned. VC appetite continues to be strong but now the hot question asked in every pitch is: “What are your unit economics?”. In some cases, founders are ready to answer the question and others just have hockey-stick charts for customer acquisition with unsustainable CACs (Customer Acquisition Costs). But beyond the adjusted pitches, business management practices have to change, along with the style of the alpha male/female founder who is all about growth. The rule should be to evolve into value generation and smart cost controls. 

Heading back to the airport to catch a flight home, I was dealing with mixed feelings from my previous corporate life and the lack of focus on profit and margins. I was a good soldier chasing and reaching my individual objectives and always felt accomplished within that narrow vision. As I boarded the plane for the quick 45-minute flight, I could only wonder how much additional value could organizations contribute if they knew exactly how to move the needle in terms of margin and not just their team’s goals. “It’s the profit, stupid,” was the phrase on my mind while nodding off in my seat.

Photo by:   Adrian Fernandez de Mendoza Ibarra

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