At some point in your professional journey, you’ll come to a crossroads and have to choose between focusing on growth and pursuing profitability. Both of these outcomes are extremely valuable to an enterprise. Owners and corporate executives strive to position their companies for maximum growth while maintaining a healthy profit margin.
Unfortunately, achieving both at the same time is nearly impossible.
In the end, it comes down to knowing the distinction between the two and making an informed decision about when to devote your attention and resources to each. If you’re at this point in your company’s life cycle, keep reading to learn about the fundamental characteristics of each path and how to choose the best option for your company.
Investors frequently put pressure on venture-backed companies to grow their top line as quickly as possible. As a result, they devote a significant amount of time and money to sales and marketing in order to expand the business and build a large client base. They make the decision to reinvest all (and then some) of the money they receive from new customers back into their sales and marketing efforts.
What makes this a valid strategic approach?
In a number of cases, it allows the company to gain a competitive advantage by cornering a specific market. If you can reach customers before your competitors, you will have an advantage in building a strong customer base. Furthermore, some businesses place a premium on the public visibility and attention that comes with rapid growth.
However, there is a cost to going down this path of entrepreneurship. Firstly, it is critical to understand that you can only grow fast before reaching a critical breaking point. If you expand faster than you can handle, you may endanger the business as a whole and find yourself amid a failing enterprise.
It is also critical to recognize that while investors are interested in seeing a growth pattern, they will “look under the hood” to discover the reality behind that growth. If your financials do not depict a long-term picture of business health, you may find yourself in a precarious situation with limited investment opportunities and a lack of financial support.
There is no denying that entrepreneurs and business owners want to be successful. That’s one of the core objectives of capitalism, after all. The primary reason for starting a business is to make money.
However, in many cases, achieving true profitability comes at the expense of sales growth. Instead of reinvesting your profits in sales and marketing, you let them pile up on your bottom line.
One of the most significant benefits of focusing on profitability is the ability to maintain financial health without relying as heavily (or at all) on outside financial support. With a profitable business, you can deliver your product or service, pay your bills, and pay salaries based primarily on the income you generate rather than investment and loan options. In the end, the business’s overall value may not be as high as in a rapid-growth version, but you own a larger portion of it.
Many entrepreneurs fail to realize that a “grow at all costs” approach to business ownership can lead to a lot of chaos and waste. In a fast-growing environment, it’s easy to become so focused on the size that you end up hiring people you don’t necessarily need, who haven’t been properly vetted, who don’t meet your ideal candidate criteria, or who can’t be properly trained.
You may even begin to adopt a “quantity over quality” mindset, which degrades the brand and jeopardizes customer loyalty. And if you don’t manage your finances properly, you might run into some serious cash flow issues that make it difficult to pay vendors, employees, and other creditors.
On the other hand, if your company chooses a profit-based platform, you won’t have to make such hasty business decisions. Instead of spending money on quick-scaling opportunities, you can build a stronger foundation by developing a solid business structure and honing your offerings. Of course, you give up market share as well as the competitive advantages of a rapid-growth model. However, you take a safer approach to financial stability.
Which road do investors prefer?
Many people want to attract investment capital for their businesses, so it is reasonable to wonder which route investors prefer. The answer is that it depends on the type of investor you want to attract. Most venture capital firms are perfectly fine to sacrifice near-term profitability in order to maximize growth. Many venture investors who see a race to lock up market share as a first mover in your space may want you to incur significant losses in the short term in order to sign up as many customers as possible today before a competitor does.
On the other hand, most private equity firms require some level of profitability before investing. They will most likely want to leverage up the business with debt to reduce their equity investment. Furthermore, debt service will necessitate cash profitability in order to pay the interest expense on that debt. So, if you’re trying to position your company for a sale to a private equity firm, now’s the time to step off the growth accelerator and start driving some profits.
All of these factors have an impact on the path your business takes. It is also true that the answers may change over time, which means your business model may require a shift to one or the other approach, depending on your financing requirements, market realities, and business objectives. Whatever path you choose, be sure to research and consider your options thoroughly.