How important is profitability for startups?

Startups face many challenges, especially in those first few years when working towards building a viable business. One of the biggest hurdles will be profitability, where your new company actually starts making money rather than just breaking even.

But just how important is profitability for startups? We’ll explore this here, in our essential guide for UK founders and entrepreneurs. This includes a look at why profitability matters, how to calculate it and how long it typically takes for UK startups to turn a profit. And of course, we’ll cover profitability vs. growth, and which one you should aim to prioritise.

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Why profitability matters for startups

There are lots of reasons why startup profitability is important. It’s essential for all businesses, so it’s no wonder that many startups seek to become profitable as fast as they possibly can.

There are a few reasons why it matters:

• It’s good for employee morale - your team wants to feel they are working for a successful company, and profits are a very tangible metric of good performance. It also helps if they feel they’re actively contributing to increasing profits with the work they do.
• Less pressure to fundraise - startups that can generate their own cash can free themselves of the need to find investors and funding, which can be extremely time and resource-intensive. There’s also less pressure to find new solutions when investors are looking to exit, and to meet the demands and targets set by current investors. This could mean, however, that growth is much slower - but it will happen on your own terms, at least.
• Freedom and control - with no investors to satisfy, you’re free to determine the growth and direction of your company. This includes what to spend profits on, according to your goals and priorities.
• The ability to survive economic slumps, unexpected market shocks and company setbacks - if you can keep some profits as cash reserves, this gives your startup a vital safety net in case of unexpected circumstances. It can make your company more resilient.
• Building consumer trust - your customers may not fully understand your growth strategy, believing that the company is performing poorly if it’s operating at a loss. On the other hand, you can win trust and credibility by reporting profits - a tangible sign of success they can get behind. It signals that your company will be around in the future, which can boost consumer confidence.

Is profitability important for investors?

Yes, profitability will always be an important metric for investors when weighing up whether a particular startup is a good bet.

Investors tend to use financial statements when assessing targets for investment. These offer a picture of the company’s financial health, including income statements, cash flow statements and balance sheets which show profit and loss.

With this data, they can evaluate the startups ability to generate profit and sustain growth. They can also determine the financial stability of the company, the efficiency of its cost management, and how much of a risk it may pose for investors.

However, growth can be just as crucial to investors as profitability. So if your startup isn’t yet profitable but has an effective and actionable plan for growth, it can still prove an attractive prospect for investors.

How long does it take to turn a profit as a UK startup?

There’s no one-size fits all rule when it comes to when a startup will become profitable - if it ever does. In fact, around 5% of startups fail in the first year, and the majority fail within the first 4 years.¹

These will be statistics you’re well aware of as a founder, as starting a business from scratch has always been a risky and courageous thing to do.

So you already know that there’s no guarantee that your startup will ever become profitable. A number of different factors can also affect profitability, including:

• Market opportunity
• Product-market fit
• The competitiveness of the market and the performance or dominance of competitors
• Revenue model
• Operational efficiency
• The ability to secure funding
• The effectiveness of cash flow management
• Initial and ongoing startup costs

The sector and nature of your business will also play a part in how soon your company will start to turn a profit.

But what about on average - how long does it take to become profitable as a UK startup? In many cases, it’s around the third or fourth year of operation.² You’ve passed through the launch, growth and break even stages, and finally reached profitability. For some companies, it happens even earlier. Some statistics have found that many new businesses start to turn a profit in as little as 18 to 24 months.³

Growth vs. profitability - which should startups prioritise?

In the startup world, particularly in sectors like tech which have heavy venture capital backing, growth is everything. There’s the risk that if you focus too much on building the bottom line and netting the cash, you’re not reinvesting profits into marketing, employees and other key elements needed for growth.

Prioritising growth has worked extremely well for some of the world’s most successful startups, many of which have grown into major corporations - from Amazon to Salesforce.

These companies may have spent years operating at a loss, because they ploughed any and all revenue into reaching aggressive growth targets. Once these were achieved and the companies grew, it was only then that they started making profits - but the profits were enormous, making any pain suffered in earlier years well worth it.

With business models like this to follow, it’s no wonder that many startups see growth-above-all as a winning strategy for long-term success. But there’s also another school of thought, one which claims that the best strategy is to find a good balance between growth and profitability.

Focusing on profits may even suit some startups better. Successful entrepreneurs such as former NerdWallet CFO Laura Onopchenko explained in a Silicon Valley Bank article that for that company, a focus on profits led to making better long-term decisions. She described one of the reasons for this as “the ability to control our own destiny”.⁴

How to calculate profit as a startup

As a founder, it’s absolutely essential to have a firm grasp on how your startup is performing financially. This means knowing how to accurately calculate operating profit.

This is the total earnings from your core business over a particular period, before deductions such as tax or expenses are made. For this calculation, you’ll exclude profits from non-core business activities. If your core business income is higher than your expenses, it means you’ve made operating profit.

The formula for calculating operating profit is:⁵

Operating Profit = (Total Revenue) – (Cost of Goods Sold) – (Operating Expenses) – (Depreciation) – (Amortisation).

What other metrics are important?

It isn’t just profitability that startups should be tracking. If you have an eye on growth as well as profitability and other targets, you may also want to look at other metrics such as:

• New customers/users - how many new clients is your business bringing on board every month/year?
• Cost per acquisition – the average cost per new customer/user, in terms of marketing, advertising and other costs
• Active customers/users – this is how many customers actively buy your products or use your services, rather than dormant accounts which may have expressed interest or bought a product many years ago
• Gross revenue - this is revenue across all operations of the business
• Return on Investment (RoI) – this is revenue generated from a sale, minus the costs of the sale

And if you’re trying to find the right balance between growth and profitability, there are some industry-specific rules of thumb you can research.

For example, Software-as-a-Service (SaaS) companies use something called the Rule of 40. This is a principle stating that a company’s combined revenue growth rate and profit margin should be at least 40%. This indicates that profit is being generated at a sustainable rate. Companies falling below this 40% mark may struggle with cash flow or liquidity in the future.⁶

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After reading this, you should have a better idea of how important profitability is for UK startups - and be able to decide whether you want your company to focus on profits, growth or find a balance between both.

Sources used:

Sources last checked on date: 01-Sept-2025