A fundamental question that each start-up must face is when to shift focus from growth of the enterprise to turning a profit. For some companies, profit is priority one right from the start. For others, profit is of no concern for years, taking a backseat to aggressive scale. But for all start-ups, confronting this question and answering it well is fundamental to achieving long-term success.
At Consero, the company that I co-founded in 2010, our business followed a fairly traditional path out of the gate. We began by hiring staff to execute our mission of building a successful events business. We then invested in office space, computers, and other resources to enable our work. Once we had all of those items in place, we proceeded to produce events and pursue sales. And throughout this period of laying critical groundwork, we were losing tons of money.
After having run some events and developing a loyal base of event participants, it became clear that our event model had a place in the economy. At that point, it had become time to confront a critical question: Do we keep growing aggressively, or do we focus on profit?
To build more scale at the same pace, we would need to plunge all of our revenues into additional hiring, which would ensure a continued net operating loss. To achieve profitability, we would need to scale back our hiring, which would necessarily inhibit our growth.
Choosing between growth and profit requires a different analysis for every company. However, there are several common considerations that can help if you find yourself at this crossroads (which, if you’re an entrepreneur, you inevitably will):
●What is the length of your financial runway?
A fundamental consideration is the extent of your financial means. In other words, how much cash do you have? If you need income in the short term and have limited capital for investment, a narrow focus on growth at the expense of profit and/or positive cash flow is likely the wrong call. Analyze your resources carefully and be sure that you build within your means. Many businesses fail because of a lack of resource awareness.
●Is there urgency to your business plan?
For some businesses, rapid growth is essential to execution of the business plan. Consider as examples Amazon, Facebook and other companies that have relied heavily on a first-mover advantage. These businesses demanded rapid acquisition of market share; profit was not a critical early element of their business plans. If your business requires accelerated growth simply to compete, be sure that it is sufficiently financed for delayed profitability.
●Are there clear long-term benefits to early investment?
For many businesses, investments in things like new machinery, higher-quality staff, or upgraded office space may cause a significant short-term loss, but they carve a path to higher future revenues and profits — not unlike a student’s investment in higher education. If it is clear that such additions to the business will provide benefits that outweigh the costs, then the investments may be worth it.
At Consero, we created our business to change the face of live executive conferences. Our short-term goal was to build scale and capture market share, investing in administrative infrastructure and processes necessary for us to deliver our model quickly and efficiently to a variety of industries.
This required that we sacrifice profitability for our first few years, but we were confident that the investment would yield long-term benefits. However, throughout this process, we have kept a very close eye on our cash position. And now that our financial runway has reached a sufficiently short length, it is time to focus on positive cash flow and profit.
My advice to other entrepreneurs is to think through these common considerations early and often.
As the economic landscape changes and your execution of the company’s business plan takes unexpected turns, the analysis of whether to shift focus from growth to profit may yield very different decisions.
Paul Mandell is chief executive of Consero, an event development firm in Bethesda.