Growth or profitability: what is best for your startup?

It is important to differentiate the type of entrepreneurship in order to answer that question. What is the right path? It depends on the business.

When entrepreneurs realize that the pace of the business will not be enough to meet profitable growth targets and money is about to run out, it is just when they are faced with the dilemma of choosing between reaching the breakeven point or continuing to grow rapidly. What is the right path? It depends on the business.

When you have a consolidated business, the strategy is to make significant profits and grow at moderate rates. However, in the case of an undertaking, the decision is somewhat more complicated.

It is important to differentiate the type of entrepreneurship. There are traditional SME-type businesses that seek to break even and obtain profits in the short term. On the other hand, there are high-impact initiatives where the strategy must be to reach its full potential by growing exponentially.

In the case of a disruptive venture, added the manager, what is sought is to become the next Unicorn or something close. There you get there with big growth in sales, not by cutting back and spending less.

That is, if the business model is high-impact and the unit economics are profitable (each operation and transaction generates profits), the option is to continue growing rapidly. Despite the fact that in the short term no profits are generated for investors.

For this, it is necessary to go out and find investors to keep the company alive and to be able to follow that path. Some investors are waiting for quick returns and others have the patience to wait for the company to explode its potential. These investors prefer that a company continues to grow, they do not want conformity and they look for companies that have the potential to be relevant in their market, despite the risks that this entails.

It should be noted that if you do not have the ability to get money from investors, it is necessary for entrepreneurs to learn it because they will do it all the time. Understanding the needs of investors and knowing how to choose them is essential for high-impact ventures. The leveraged growth curve per investment will depend on the ability to obtain funds at each stage of the company’s development.

It is not about undertaking to lose money. Startups go through a stage in which growth requires a continuous investment in expenses that are seen as losses, until the volume of the company is so important that it allows its consolidation and, with it, turns towards a profit generation strategy optimum.

Companies like Amazon and Facebook were in losses for a long time, but business was good as a unit, so it came to a point where revenue outstripped expenses, in a big way. Uber, Airbnb or Rappi are startups that have not generated profits so far. However, given the profitability of the unit economics and their high impact on the market, investors are encouraged that they will be able to achieve very high returns in the future.

On the other hand, choosing to break even means stop raising capital, make a profit, survive, and move on. These concepts translate, in the short term, into profitable operations and greater peace of mind for conservative investors and even founders, but the future value of the company is possibly being sacrificed.

The main disadvantage of this choice for startups is that the day will come when the competition will appear which, with a growth strategy, will end up taking your customers and eliminating you from the market.

Entrepreneurs need to think about things that are truly transformative. If they really are, they will find investors willing to help them until they reach the desired breakeven point.