Hard Choices: Growth versus Profitability

Quite a few companies are finding themselves in a situation roughly as follows: they have raised a lot of money at high valuations on a fast growth story, have real customers and the beginning of revenues, but growth has slowed down; they have money in the bank for 12-24 months and now need to decide between a strategy of rekindling growth or trying to push to profitability.

This is a complicated decision to make and I see a lot of teams struggling with it. There is no easy answer and only one thing is clear: you have to make a conscious decision between the two paths and make significant changes to your organization now in *either* case.

Picking Growth

The bull case here is that if you restart growth then you can raise more money and maybe even achieve an up-round in valuation. The bear case is that if you fail to do so you will be out of business. Put differently, picking growth is the “high alpha” path, meaning it increases risk while also having the possibility for a higher payoff. Many venture investors will like this since they have a portfolio and with power law returns (which now dominate many industries) a single big hit will far offset many losses.

Teams may also at first blush find this easier because it is what they have been working on. But therein lurks a danger. In all likelihood it will take you a lot longer than you think to rekindle growth. And getting back to growth is in many ways harder, the bigger your organization is. Why? Because there will be more people who are defending existing ways the product works which makes it harder to try something different. Serious experimentation is exactly what you need though.

So if you want to pursue the growth path and have had several “fat years” you must trim down your team and product. Only with a lean approach are you giving yourself the room — both in terms of time and ability to experiment — to have a good chance at getting back to high growth.

Picking Profitability

The bull case here is that if you are at or near profitability then you can be the master of the fate of the company and no longer depend on new investors (existing investors tend to put up the money that may be required to close a small gap). The bear case is that you may be “stuck” in a company that’s not very valuable and barely squeaking by. This is the “safer” option but of course some risk remains that you won’t make it at all.

Choosing the profitability path generally requires a shift away from product and engineering resources towards sales and marketing. Again it will take you longer than you think to get there and there is a lead time for new sales people to become productive and new marketing initiatives to produce leads. Committing to that requires a meaningful reorientation of senior leadership priorities and often some changes to the senior team.

This path doesn’t sound like fun for a lot of founders. And there’s a fear that you might not make it after all, or if you do make it, not have something that’s all that valuable. There is a view that you “should go big or go home” or that you should “fail fast.” The idea is that this should be true not just for VCs (see above) but also for founders and employees because they can then join another startup which once again might have a shot at high growth.

The counter though is that if you are working in a domain that you love and believe in the mission of the company, then you should be willing to stick with it for a long time. Becoming profitable has massive optionality of its own: the ability to go on for many years with new experiments any one of which could then ignite growth. I wish more people would take that view but it requires patience, discipline and conviction.

Of course life would be a lot easier if you didn’t have to make this choice — and, if you can raise more money, you may not have to. But increasingly companies will have to make this choice and make it in a pronounced and clear fashion. And the ones that do will have a good shot at either growth or profitability. The ones that will continue to go down both paths at once, however, are likely to run out of money before achieving either.

Posted: 12th October 2015Comments
Tags:  startups hard choices

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