If you want to keep investors from losing money on your stock after you go public, it helps if you can grow fast and earn a profit. I know this sounds like a really obvious point-- but a look at the crop of companies going public these days reveals that most of them don't get it.

If the company is not profitable before it goes public, investors will balk at the IPO. A case in point is Lyft -- the unprofitable ride-sharing company that went public March 29 and by April 15 had fallen 36 percent from its first-day high price of $88. This begs the question-- can a startup grow fast and be profitable? And if so, how would that work?

As I wrote in my new book, Scaling Your Startup, companies like Lyft skip the second stage of scaling-- building a scalable business model. They go from the first stage-- winning the first customers-- to the third-- sprinting to liquidity.

What exactly does it mean to build a scalable business model? Here are the two keys:

1. Get more efficient as you grow.

The key point of Scaling Your Startup is that what gets a company through the four stages of scaling is different at each stage.

For example, for a company to get its first customers, it needs a team of people who are comfortable doing many different jobs and a willingness to work endless hours at peak intensity to create and keep its first customers.

But once a company focuses on building a scalable business model, some CEOs can't do what's required. For instance, they must hire marketing, sales, product development, and customer service executives and let go some of the people that helped them get through the first stage of scaling.

They'll need to articulate the values that enabled them to succeed so that the new executives and others that they hire will understand the culture. And those new executives must make their functions much more efficient.

Zoom Communications Technology, a fast-growing, profitable San Jose, Calif.-based company recently filed its IPO paperwork. Zoom doubled its 2018 revenues to $330 million while earning a $7.6 million profit, according to its IPO filing. 

Zoom has made its business more efficient. How so? In the year ending January 2017, its operating expense to sales ratio was 79 percent-- the same as in the year ending January 2019. Meanwhile, Zoom's gross margin-- the ratio of its revenues less direct costs to revenues-- increased from 79 percent to 82 percent.

2. Make your product more valuable to customers as you grow.

To make your business model scalable, make a sale and keep in touch with the new customer. See that the customer is using your product and getting value from it. Most importantly, you have to listen carefully to uncover unmet needs which can become the basis for new products.

Zoom is very customer-oriented because of its CEO, Eric Yuan. He left Beijing in 1997 to be the founding engineer of WebEx. Cisco Systems bought the video conferencing company in 2007 for $3.2 billion and Yuan stuck around Cisco as a VP in its Collaborative Systems group.

Yuan was not happy with the way Cisco was managing WebEx when he left in 2011. As he told me in a 2017 interview, "I was paid very well as a VP at Cisco. But WebEx was my baby. In 2010 and 2011, I did not see happy customers. I was very embarrassed that I spent so much time on the technology. Why are the customers not happy?" He could not convince Cisco management to fix the problems so he left and started Zoom.

Zoom does a better job of meeting customer needs than its competitors do. In February, I spoke with a former Cisco customer who switched to Zoom. As BAYADA Home Healthcare application manager Dennis Vallone explained, his company switched because Zoom better met its needs for high quality, reliable video in all locations-- not just the ones with high bandwidth.

Zoom also excelled at listening to BAYADA's needs and giving them what they asked for. As he said, "We asked for digital signage and room scheduling and they delivered."

If you want to make your company responsive to customers in that way, culture is crucial and so is a skilled customer success organization. As Jim Mercer, Zoom's head of customer success, told me in February, "Here execution for the customer is our true north. We have a consultative approach to building our service-- working with our customers and our product development teams. We listen and implement features if enough customers request them."

Don't make the same mistake as Lyft. Build a scalable business model before you sprint to liquidity.

Published on: Apr 15, 2019