Entrepreneurs are always pondering over whether they should build a profitable venture first, or focus on growth and postpone profitability?
Frankly, there is no clear answer. It depends entirely on the industry, market conditions, the size of the opportunity, the mindset of the entrepreneur, and the future strategy. If you are targeting a massive market opportunity with a huge headroom for growth, then pushing profitability out for sometime is certainly worth considering. Also, if the strategy is to rapidly grow revenues and drive valuations for a strategic acquisition in future, again you could think of growth over profitability. On the other hand, if you are in a market with intense competitive activity, being profitable adds a lot of muscle and staying power even if fundraising becomes tough in future.
I have always thought of this conundrum using a cricketing analogy. If you win the toss in a test match, do you bat first or bowl? My strong view is that you always bat first. On flat pitches and in sunny conditions you definitely bat first. Under cloudy conditions or bouncy pitches, you should think hard for a while but still bat first.
In the same manner, entrepreneurs must always focus on building a profitable venture, howsoever the situation may be. If market opportunity and competitive activity suggest growth first, then founders must think hard but still focus on profitability. For sure, growth is critical, but the reality is that growth over profits essentially means the venture is always dependent on raising capital for survival, and this is risky. While some ventures do get lucky with indefinite funding support or fortunate acquisitions, even the most storied and highly valued start-ups with a long list of impressive investors can suddenly run into situations where funding stops. Instantly, the highly valued start-up can go into a downward spiral.
Make no mistake, a small profitable start-up that is growing steadily is more valuable than a highly valued venture that is registering massive revenue growth but is hugely unprofitable. A venture that raises billions of dollars but is unable to break even, despite several years of operation, is a badly run venture, whatever be the revenues or valuations.
The only caveat I would add is that this depends on the industry. If you are in a venture that requires long gestation for product development or infrastructure investment, such as space launches or battery manufacturing, profitability will certainly take a while longer. But it cannot be permanently postponed.
Which brings us to the equally important question of when a venture should raise external funds, and how much. Let’s talk about this in a future column.
(The writer is a serial entrepreneur and best-selling author of the book ‘Failing to Succeed’; posts on X @vaitheek)