Entrepreneur and leader, Jessica Kruger discusses why it’s time to stop focusing on profitability and more on growth. Ultimately, the growth of a company is the point where you are reaching expansion and allows for you to seek additional options in order to generate more profit. So, if you aren’t considering growth within your business strategy maybe it’s time you should.
In the world of start-ups, when it comes to growing one’s fledging enterprise there are two camps: the bootstrappers and the fundraisers. Each the polar opposite of the other, and each with their vocal supporters.
Bootstrapping (a.k.a. scrimping and scrounging, and generally keeping things lean) and its cousin organic growth, prioritise making money (i.e. profitability) from day one in order to keep the business alive. The all-important growth curve is less hockey stick and more gently rolling hills.
Fundraising, on the other hand, is about bringing in large amounts of cash to “burn” in the attempt to reach explosive growth. In general, companies that fundraise have no desire for profitability, rather the short to medium term goal is to grow revenue and/or users like crazy. Once the company has a loyal following, getting profitable can be worked out down the track.
Like everything in life, both approaches have their pros and cons. Let’s jump in and take a look at each in turn.
Let’s look at the first point: capital. There’s a well-known statistic that female-led start ups receive just over 2% of all venture capital funding (Harvard Business Review, 2021). It’s an obscene and frankly sickening metric. Mixed teams fair slightly better, but suffice to say that there is a whole swathe of the founder population that finds it hard to raise money.
Venture capital is not, of course, the only way to raise funds. The first port of call in launching a business is usually the colloquial family friends and fools. Along with crowd-funding and angel investors, there are happily more and more alternative finance tools, as well as grants to be had.
But sometimes a new business, with no track record and untested founders, will struggle to tick the boxes of investors, or will fall short of the financing criteria. A founder may be left with no alternative than to get their business off the ground by earning money from day one.
If financing a nascent business is less of an issue, sometimes founders actively choose to grow-it-alone out of a desire to maintain control. Sometimes it’s a bad experience in a previous partnership; sometimes it’s a personality trait or preferred working style; sometimes it’s the desire to do build the company at their own pace, without external pressure. Whatever the reason, most businesses are in fact built this way. It’s only the glossy, venture-backed enterprises that we tend to read about.
The biggest benefit of prioritising profitability is less pressure and thus less stress coming from outside sources. If you’re paying your way, you have no one to answer to.
Of course, that doesn’t mean a bootstrapping founding team is going to be sipping margaritas come 5 pm. Rather they have their own unique set of stresses. Indeed, the biggest stressor may well be about keeping the business afloat, and fighting to make ends meet: many businesses fail within the first few years, often due to cash flow shortages.
Perhaps counterintuitively, another positive aspect of prioritising profitability is that a founder is likely to be under less pressure to make decisions that compromise the initial vision. This is particularly relevant with regard to ethically-based companies, where pressure to hit commercial targets might lead a brand to undermine its values.
One of the immediate benefits of raising capital is the exciting number of resources subsequently put at a brand’s disposal. First and foremost, that means cash in the bank, which can in turn quickly translate into hiring an enthusiastic and talented team. A strong team is the most important element in getting a company moving.
Not to be overlooked, an injection of funds also means that founders are likely to receive a decent salary, which will hopefully make the (even longer) hours they’ll soon be putting in that little bit more comfortable.
An important consideration for ethical- or sustainability-oriented businesses is that hockey-stick style growth will magnify the impact you are striving for. Does your start up empower women? Fantastic: with funding and going-for-growth, you’ll empower vastly more females versus work at a small scale. Does your idea help society shift towards green energy? Excellent. You’ll likely need massive growth rates to even attempt to break into the utilities sector. For some businesses, time really is of the essence to grow and to scale, so prioritising growth makes complete sense.
One of the downsides of prioritising growth is that “more” will probably never feel enough. Each time you reach a major milestone there will be a celebratory pause, but it will soon be forgotten as the next, higher target is put on the scoreboard. In short, it may feel like a hamster wheel.
Whilst attitudes are changing, investors typically want to see a return on their investment in a relatively short timeframe. This means that a firm is likely to be on the hamster wheel, flinging everything it has at punchy goals. If the team is not careful, burnout can easily begin to claim members.
Then there’s also the fact that people tend to change when money is involved. You may find that friendly, supportive backers are not so friendly when the chips are down.
Finally, something to bear in mind with raising money is that, it’s often described as a full-time job, and also a company may well have to do it again, and again and again, with Seed leading to Series A, leading to Series B and so on. It’s not usually a one-off occurrence.
Remember, there is no single correct answer. One of the best things to do is to follow your instinct. It’s usually pretty accurate.