Should Startups Focus on Growth or Profits?

Should Startups Focus on Growth or Profits? - Scott Anthony - HarvardBusiness.org
"Today's tough economic climate is surfacing an interesting debate: should emerging Web 2.0 disruptors prioritize financial results or audience growth?"

I would say growth in terms of product users. The option to grow might not be as lucrative as the option of showing profits to the VCs. But if you are planning to stick around, having a growing user base will provide you ample opportunity to fine tune the existing business model or create a new one.

But if you are in it for the short run, go for profits. By short run I mean those hit-n-run entrepreneurs (if you can call them entrepreneurs). These are the individuals who have neither the business acumen nor strategic vision to create a great company. They create a product, let it out in the wild, fish some users and using the resulting profits as leverage sell the company to the highest bidder. A typical example is Yammer (also highlighted in the article above). Compared to Twitter, who are focusing on increasing their audience than profits, Yammer with about 60,000 users are on the path to hit-n-run.

Then again, a startup, in my opinion should decide whether to grow audience or profits depending on the team it has. Especially the business savviness of the leadership team. If your team is a bunch of panicky amateurs, by all means sell and payback investors and (if you give stock options) employees. But if you have true visionaries in your leadership team, grow and become a lifetime employer. Let history remember the name of your company and you as the founder.

Comments

Bimal said…
I've seen too many startups concentrating on product development and maybe also trying to secure strategic business (in other words big names but with little money for the project) and making huge losses in a few short years.

In my opinion profits are a vital part of any startup, regardless of whether you have VC backing or not.

My advice would be to keep it small and simple initially until you make good operational profits, then venture out. Try to avoid VCs where possible - remember there is no such thing as a free lunch.
Tyrell said…
Bimal,

I see your point. But most of today's businesses especially those in the technology sector can't depend on the "profit and re-invest" model. Due to the huge initial capital required just to enter into a global market, not only for product development but areas such as marketing and brand development, a startup does require a capital infusion from an outside party. In fact I had a similar discussion with my marketing professor recently.

What VCs give you is this very capital infusion required to attract top talent to develop a product and market it. Hence escaping from a vicious cycle. Usually VCs give startups a certain time period to break even. This is perfectly fine and under a good leadership team can be achieved in 3 to 4 years (unless you mis-estimated or mis-calculated).

In terms of sustainable profits, growing and capturing market share or creating a new market segment altogether (The Blue Ocean Strategy) is the way to go IMO. The luxury of having a huge audience for a product also gives you the ability to experiment with your business model.

Take Microsoft for example. Bill Gates himself once said, that they aren't worried too much about piracy in this region, especially in China. Why? Because in the end, they are increasing the audience for their product. A user with a pirated copy of Windows is still a "Windows User". They will eventually figure out a successful model to harvest money from them.

I hope you see my point now. But in the end it's up to the startup to decide whether they want to sell an x number of products and show profits immediately or put their resources to put the product in the hands of 100*x users first and then fine tune a model to rake in money from those.

That's how I see it at least :)

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