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Should we focus on profitability instead of growth?

Read this article and found it interesting in terms of how it might affect the VC/startup relationship, or "game" as the author refers to it. Startups traditionally take VC money and start growing, but Fred Wilson thinks it might be because no one has ever told them that getting to sustainable profitability might be a better option. Curious what others think about this growth vs. profitability debate when it comes to funding?


8 Replies

Bill Kelley
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Bill Kelley Entrepreneur • Advisor
Business Mentor
Generallization is hard here because the question is market-dependent.

If there is a small window of opportunity, and if exposure to the product/service opens the door to other solutions, then the traditional VC funded fast burn/high development cost may be warranted.

If the product has a high barrier to entry, then self-funding growth is clearly the best route.

The truth is, VC money comes at a nearly-intolerable price for most companies. A real "hockey stick" projection with some evidentiary backing can get a VC's attention, but they will want to see a likely 400-1000% return and they will require prioritization of that return.

...at least, that has been my direct experience.
Shingai Samudzi
0
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Shingai Samudzi Entrepreneur
Founder & CEO at ProjectVision
Agreed with Bill. If you have a consumer or B2C product that has relatively low startup costs, you can own more of the company pie by focusing on sustainable profit first. The overall success rate of startups is fairly low as it is, so if you can actually make money early on, you are in good shape.
Reed Berglund
0
0
Reed Berglund Advisor
Discover how this technology leader helps businesses turn their social video channels into profit centers.
Bill hits the nail on the head. It's subjective to the product and market being addressed. Often entrepreneurs default answer to funding is venture capital. But because of the intolerable nature of VC investment it can force quick failure of a company that's not aligned for the VC metrics.
Alfredo Chaparro Manrique
0
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Founder of FinXGlobal
As though any company is different as Reed said, but every company should focus on both, profitability it's an issue when the company is not growing to it's expectations. But overall the financing mix of the company both on capital and financing expenditures should be efficient to support the operational assets of the company, ideally it should be invested in Liquid Operational Assets to provide solvency and a better cash-flow.
Camille Leon
0
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Camille Leon Entrepreneur
Founder of the Holistic Chamber of Commerce
As someone who has focused on growth, doubling revenues year after year for 3 out of our first 4 years, I'm currently wishing we had focused on profitability. While we've covered the majority of costs, when it comes to getting even a small loan to fund the last quantum leap to full profitability, we would've been better served to focus on profits first and then growth. The good news? If we can jump this last hurdle, we'll be in a very sweet spot!
James Hogan
0
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James Hogan Advisor
Vice President of Worldwide Sales at ShareVault
Fred is spot on.

Investors will fund growth (v. profitability) if the market is huge and the risk of capturing the market is relatively low compared to other opportunities.

Venture investors will not fund intial customer development work (aka "traction").

Risk is the issue for all investors. That will never change.

Founders need to present a risk adjusted story, with appropriate returns, that positions the opportunity favorably against competing opportunities.
John Seiffer
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John Seiffer Advisor
Business Advisor to growing companies
The way I read Fred's article it says the common wisdom is to go for growth over profitability, but you miss out on the discipline imposed by profitability and SOMETIMES you can do both.
Jim Houghton
0
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Jim Houghton Entrepreneur
General Manager Global Field Operations, Cloud Business Unit at CSC
Eleanor, it really depends on your goal for your company. If you're looking to get a big valuation - so you can get a great deal on a VC round, or to raise the exit price for a sale or IPO - then growth is the name of the game. If your goal is not one of those two things your focus should be on building a well-run, profitable (sustainable) business. Failing to do so will ultimately force you into the other situation, and if that doesn't happen you'll quickly find yourself in a death spiral. Jim Sent from my iPad
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