3 Profit Before Revenue
3.1 “Is This Worth Doing?” Is a Profit Question
By this point, it should be clear that when entrepreneurs ask whether something is “worth doing,” they are not asking an abstract or philosophical question. They are asking whether an initiative can plausibly justify the commitments it will require.
In practice, that question turns on profit.
Profit is not the only thing that matters in entrepreneurship, but it is the constraint that makes the decision real. A venture that cannot plausibly generate profit cannot sustain itself, cannot scale responsibly, and cannot support the irreversible choices it will eventually demand.
For this reason, the question of worth is inseparable from the question of profit—even before revenue exists.
The Mistake of Postponing the Profit Question
Despite this, most entrepreneurship advice encourages people to postpone profit questions.
The usual logic is that profit is unknowable early on, so it is better to focus on learning, experimentation, growth, or traction, and to worry about economics later. In practice, this often means building first and asking hard questions second.
This approach feels reasonable because early ventures lack the data people normally associate with profit: revenue histories, cost reports, margins, and financial statements. Without those numbers, profit can feel speculative at best and meaningless at worst.
From this, many people conclude—explicitly or implicitly—that profit simply cannot be evaluated before launch.
That conclusion is understandable. It is also wrong.
Postponing the profit question does not eliminate it. It defers it until more resources have been spent, more commitments have been made, and fewer options remain. By the time profit is confronted directly, the cost of being wrong is often much higher.
Asking whether something is worth doing only after those commitments are in place is not prudence. It is surrender.
Profit as a Decision Object, Not an Outcome
Another source of confusion is the belief that profit can only be assessed after the fact.
In accounting, profit is a realized outcome, recorded once transactions have occurred. In entrepreneurship, profit must be treated differently. Decisions about pricing, investment, scale, features, positioning, and timing must all be made before outcomes are known.
Those decisions implicitly assume future profit. Whether or not that assumption is made explicit, it is always present.
Every decision to proceed, delay, invest, or walk away carries an implicit judgment about whether the initiative is worth doing economically.
The question, then, is not whether profit judgments will be made.
The question is how they will be made.
They can be made implicitly, through intuition, analogy, and hope.
Or they can be made explicitly, through evidence, analysis, and disciplined reasoning under uncertainty.
This book is about the second approach.
Why This Question Must Be Asked Early
Evaluating profit before revenue exists is uncomfortable because it forces clarity in the absence of certainty. It requires separating what is chosen from what is unknown, and what is unknowable from what can still be learned.
That discomfort is not a sign that the question is premature. It is a sign that the question is essential.
Entrepreneurship does not become less uncertain by waiting. It becomes more constrained. The earlier profit-relevant questions are asked, the more freedom there is to act on the answers—whether that means proceeding with confidence, changing course, or deciding not to proceed at all.
To reason about profit before revenue exists, however, we must first understand why it feels so difficult—and where the uncertainty actually lives. That work begins by looking carefully at the structure of profit itself.
3.2 The Profit Equation as an Epistemic Map
When people think about profit, they often think about accounting. Income statements, margins, and cash flows come to mind. Those tools are indispensable once a business is operating.
Before revenue exists, they offer little help.
To understand profit before revenue, we need a different lens.
A simple profit equation provides that starting point:
\[ \mathsf{\pi} = \mathsf{pq - cq - f}. \]
This equation is not new. What matters here is not its novelty, but how it helps us see profit.
Used properly, the profit equation is not a calculation. It is an epistemic map—a way to locate uncertainty and distinguish what is chosen from what tells us something about the world.
What Is Chosen and What Is Unknown
Before a business launches, most elements of the profit equation are the result of decisions.
Price is chosen by the firm. Whether pricing is simple or complex, fixed or dynamic, it is ultimately a decision variable. Firms may not know the “right” price in advance, but they are not ignorant of price altogether.
Costs are also largely chosen. Variable costs reflect design and operational decisions. Fixed costs reflect commitments to capacity, infrastructure, and overhead. These choices may be constrained, but they are not unknown in the same way demand is.
Quantity is different.
Quantity is not chosen by the firm. It is revealed through customer behavior.
It depends on how many customers exist, whether they care, what they are willing to pay, and how sensitive they are to price and alternatives. Before revenue exists, quantity is the only element of the profit equation that cannot be set by decision alone.
This is the central insight:
Before revenue exists, profit uncertainty is almost entirely demand uncertainty.
Why This Insight Matters
Early-stage ventures often feel uncertain in every direction. Markets are unfamiliar. Customers are unknown. Competition is unpredictable. Costs may change. The future feels opaque.
The profit equation helps discipline that feeling.
It shows that much of what feels uncertain is actually the result of choice. Pricing, cost structure, and investment levels are not mysteries waiting to be solved by the market. They are commitments the firm makes.
Demand is different. Demand must be learned.
Recognizing this allows effort to become focused rather than diffuse. Instead of treating everything as equally unknowable, attention can be directed to the uncertainty that actually determines whether a venture is worth doing.
3.3 Why the Obvious Tools Fail at This Question
At this point, a reasonable reaction is to ask:
So how do people usually try to answer this?
Entrepreneurs are not short on tools. In fact, most people confronting an early-stage profit decision reach for frameworks that are familiar, widely taught, and socially validated. These tools feel serious. They feel responsible.
The problem is not that these tools are useless. The problem is that they were not designed to answer the question at hand.
Accounting: Useful Too Late
Accounting data is extremely useful—after a business has revenue.
Income statements, margins, and cash flows tell you what has already happened. They are backward-looking by design. Before a venture operates, there are no transactions to record and no profits to observe.
Attempts to “do accounting early” usually involve inventing numbers that resemble accounting outputs. These numbers borrow the authority of accounting without its empirical foundation. They look rigorous, but they do not evaluate profit.
The absence of accounting data before revenue exists is not a temporary inconvenience. It is a structural fact.
Five Forces: Structure Without Outcomes
Porter’s Five Forces framework helps describe competitive pressure. It organizes thinking around rivalry, entry, substitutes, buyer power, and supplier power. As a descriptive tool, it can be useful.
What it does not do is estimate profit.
Five Forces contains no prices, no quantities, and no link between competitive structure and economic outcomes. Assessments of force strength are ultimately subjective, and two industries that look similar on Five Forces can support very different profit potential for a specific venture.
The framework classifies environments. It does not evaluate opportunities.
Business Model Canvas: Description Without Evaluation
The Business Model Canvas helps people articulate how a business is supposed to work. It is useful for communication and alignment.
It does not answer whether the business will make money.
You can fill in every box, validate every assumption, and still lose money. The canvas describes components, not economic consequences. It contains no mechanism for estimating willingness to pay, price sensitivity, or quantity sold.
Coherence is not the same as viability.
TAM, SAM, SOM: Scale Without Demand
Market sizing frameworks are among the most common tools used in early evaluation. They are easy to compute, easy to present, and easy to believe.
They do not estimate profit.
TAM, SAM, and SOM focus on scale, not value. To get from market size to profit, one must assume a market share of an imagined market at an imagined price. Quantity sold is never learned; it is assumed.
These frameworks work best when entering stable, well-understood markets. They break down precisely in the kinds of settings where new ventures and new business models operate.
Pro Forma NPV: Precision Built on Guesses
Pro forma cash flows and discounted cash flow analysis are explicitly profit-oriented, which is their appeal.
But every number inside them is an assumption.
Prices are guessed. Costs are guessed. Growth rates are guessed. Most importantly, quantity sold is almost always assumed rather than estimated. Discounting does not solve this problem; it simply adds mathematical precision to uncertainty.
The output reflects the inputs. When the inputs are guesses, the output is a refined guess.
The Pattern
Stepping back, a pattern emerges.
None of these tools estimate demand.
Quantity sold is never learned.
This is not because entrepreneurs are careless or unsophisticated. It is because they are using the best tools they have been given—and those tools were never designed to learn demand.
The profit equation makes this visible. If profit uncertainty before revenue exists is primarily uncertainty about q, then tools that never engage with q cannot answer the question of whether a business is worth doing.
This book begins from that recognition and takes a different starting point.
3.4 Profit before Revenue May Feel Impossible
At first glance, talking about profit before revenue exists can sound contradictory. If nothing has been sold, how can profit be evaluated at all?
The answer is that evaluation does not require observation.
Before revenue exists, profit cannot be measured. But it can be evaluated—by understanding the relationships among price, quantity, and costs, and by forming disciplined judgments about the range of outcomes those relationships imply.
Treating profit as unknowable until it appears on a financial statement confuses realization with reasoning.
Entrepreneurs do not have the luxury of waiting for realization. Decisions must be made earlier.
3.5 Demand as the Anchor
If profit uncertainty before revenue is primarily demand uncertainty, then demand becomes the anchor of profit evaluation.
This does not mean costs and competition are unimportant. They matter, and later chapters address them carefully. But without a credible understanding of demand, refinements to cost structure or competitive positioning are premature.
The logic of this book follows directly from this insight. We begin with demand. We then examine how costs, competition, and strategic interaction modify profit.
The structure of profit tells us where to focus first.
The next step is to understand demand itself.
3.6 From Structure to Focus
Recognizing that demand anchors profit evaluation does not yet tell an entrepreneur what to study next.
Early-stage ventures and mature companies face the same unknowns when facing a decision about a new initiative:
- who the customer really is,
- what problem matters most,
- how price-sensitive demand might be,
- whether demand is large enough to justify entry.
The profit equation helps locate uncertainty, but it does not prioritize it.
Before gathering data or running analysis, entrepreneurs must make a more basic move: they must decide which uncertainty matters most for the decision they are facing right now.
Without that focus, analysis can be careful and still miss the point.
Data does not tell entrepreneurs what to do. Questions do.
Evidence becomes useful only when answering a question would actually change the action taken.
Clarifying the decision, the uncertainty that blocks it, and the question whose answer would reduce that uncertainty is the step that makes learning demand possible rather than accidental.
That step comes next.