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Who doesn’t like to be profitable? You would think that all the parties involved in a company wanted to be, right? Investors could claim dividends; the entrepreneur would not have anxiety that his burnrate will leave him without funds; employees would be assured of receiving their fortnight. What if I told you that there are companies that make a conscious decision not to be profitable, would you believe me? Of course, this decision is made in favor of another of the sacred elixirs of entrepreneurship, which is sometimes the nemesis of profitability: growth at any rate .
It is not that a company cannot be growing and profitable, but when you talk about a recently created company or one that is entering a new market, which seeks aggressive growth of the “Silicon Valley” type and whose graph points to the sky at way of hockey stick, then this combination of growth and profitability becomes scarcer than a unicorn itself. And it is that this school of aggressive growth, imported from Silicon Valley, has created precisely many of the unicorns that are minted today; that is, companies whose valuations exceed one billion dollars.
So what strategy should you follow as an entrepreneur:
- Grow by bootsrapping (saving every penny) looking to be profitable as soon as possible, or
- Invest aggressively in growth, forgetting about profitability at least in the short term.
Unfortunately, there is no one correct answer, and opinions are filled with animosity from entrepreneur to entrepreneur, and from investor to investor. It is possible for a company to become successful by following any of these schools of thought, but also, for some others, a wrong decision in this strategy can be the difference between becoming a unicorn or dying.
Growth strategy
Even among those who are not from the school of growth, they will tell you that, if you follow this trend, you should do it only under certain conditions. For example, you must validate that you have almost guaranteed funding. This strategy requires large amounts of capital, because many times the higher growth you achieve, the greater initial losses you will have (see Venmo case, below). If you don’t have funding, you won’t have a future when your cash runs out. And is that one of the aggressive growth enhancers is to carry out aggressive promotions to attract customers, such as: eliminate commissions or charges to your customers for their first orders; offer incentives for products, services, or even cash; lower prices to the end of the tables (or even to gross losses); among others.
An example of this strategy is the one that Paypal followed to grow Venm or (one of its acquisitions). Venmo is a leading US application for making payments between people with the help of a smartphone. To become successful, Venmo had to be the predominant player in its space, since the holy chalice of these electronic wallets is to be able to make money transfers between users of the same application, thus reducing the cost and increasing the speed of their transactions. .
But in order to get users who also had funds in the wallet to carry out transactions, they had to have an aggressive strategy of ” cash-in “, or entry of funds to the platform, and then they figured out how to deposit funds from your credit card without commission. as a promotion. That is, if you added funds to Venmo with your credit card, they charged you 0% commission, so Venmo (well, Paypal), was assuming the cost of about 2-3% for every dollar that was entered into the application. this way. 2% doesn’t sound like a lot, but trust me, if it weren’t for the giant Venmo behind it (Paypal), it would have run out of funds right away.
If you do not have secured funding, or there is a relative drought in venture capital investments in your segment, following a strategy like these is very risky. It would possibly imply closing the doors of your venture without having given you a chance to be successful.
There are many other examples of these aggressive growth strategies, and it is not that difficult to detect them, because as a potential user they are very attractive. Do you remember when DiDi entered Mexico to compete with Uber ? At that time, one of their promotions was to give you 500 pesos in travel. Can you imagine the cost that this represented for DiDi? If we assume that each trip you make costs an average of 100 pesos, Didi would stop receiving income from a user who took this promo until the sixth trip. In addition, DiDi would have to pay drivers approximately 25 pesos per trip (125 pesos for 5 trips) from its purse, without considering that it also offered promotions to get drivers.
Didi not only had sufficient capital, but also recognized Uber as serious competition, possibly the only way to successfully enter the Mexican market at the expense of short-term profitability.
For many other entrepreneurs, this growth strategy is simply not even an option, since they have not achieved investment rounds or the amounts invested are not enough to implement it.
Profitability strategy
This is the default option for entrepreneurs, because the excessive growth strategy is very capital intensive. The downside of following this strategy is that you could be ceding users to your competition who do have the capital to invest in aggressive growth. But there have also been very strong success stories under this scheme. As an icing on the cake, generally being successful with this strategy culminates in your holding a much larger share of your company as an entrepreneur.
One of the examples is Lower , a financing company that took 7 years to seek its first investment round of $ 100 million, and that is also profitable. Other examples are Galileo or Qualtrics , which were recently acquired for $ 1.2 billion and $ 8 billion, respectively. This strategy, which places greater emphasis on expenses, takes more time for a startup to determine its success. If the growth strategy involves burning the candle on both sides to see if you light the fire, this strategy is more about carefully lighting your few matches, one by one, to light the fire.
In conclusion, many times the strategy you take is the product of your available capital, but other times it will be a decision. Would you take funds from SoftBank, for example, knowing that your strategy is to grow or how you can afford and own the world? Or would you look for a fund that has a long-term perspective, that could give you a better chance of being successful (less expense), but that surely you would not achieve it as quickly or at the expense of granting more of your shares? What do you think is the correct strategy?
https://www.entrepreneur.com/article/379577
