The question of focusing on profit or growth has never had an easy answer. Given the impacts of COVID-19 startups might need to re-evaluate their choice.
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There are many methods through which to measure the success and potential of a startup. But the two favored by investors and experts tend to be growth and profitability. Does your company have the potential to capture a large portion of the market? And does it have the potential to be profitable?
Unfortunately, the nature of business means that starting out it’s unlikely you’ll be able to focus on both of these factors. Entrepreneurs need to decide whether they’ll reinvest all profits back into the business to fund scaling or whether they’ll keep a cashflow reserve and build their business little by little. In today’s reality of pandemic-related challenges and general economic uncertainty, this choice carries extra weight.
Keeping Cash in an Uncertain Economy
This spring was record-setting in terms of economic upheaval. Not only are businesses and consumers alike still reeling from the market shock, but banks, investors, and financial institutions are fastening down for a new period of conservative spending. And although digital companies are at an advantage as far as viability in a post-pandemic landscape, funding is still a key factor for success.
With available investment funding at a decade-long low, startups need to be cautious with how they’re reinvesting capital back into their business.
Scaling back costs and focusing on solid, albeit slow, growth not only incurs less risk, but it also allows companies to adapt to changing situations as they appear. Instead of guessing on how things will turn out and blazing ahead, the smarter decision may be to take the company’s growth little by little.
“The unpredictability of startup life can make the use of profits to shore up cash flow a smart decision,” shared Matt Jonns, founder of ucreate, a startup support service. “Keeping money aside for a rainy day is often just as important as reinvesting and could be the difference between survival and extinction when times are at their hardest.”
In times of crisis, playing the long game is often a wise decision.
Crisis Creates Opportunity, Growth Captures It
On the other hand, crises have historically created opportunities for young companies to stake their claim in crowded markets. Faster and more agile than larger incumbent organizations, startups are able to meet customers’ demands quickly and accurately. During times of crisis, where consumers have fast-shifting needs, this gives startups a notable advantage.
So as the world undergoes a widespread digital transformation, there’s an opening for digital startups to stake their claim in crowded markets.
“You can always tinker with revenue models and long-term profitability, once a large audience has been built. You can’t always get and maintain an early mover advantage.”George Deeb, Managing Partner at a startup consulting and financial advisory firm
Companies such as Amazon and Facebook weren’t profitable for years. Due to the nature of the business, they knew that success lay in cultivating a large audience. Once they had established themselves as the leader in the space, they focused on configuring a revenue model through which they could monetize their vast audience.
So Which One Is It?
The profit vs. growth question has never had an easy answer, and COVID-19 has certainly not made the choice any clearer. Entrepreneurs and business leaders need to evaluate where their companies stand in relation to the current climate and establish whether now is the right time to grab hold of crisis opportunities, or whether now is the time to conserve capital and wait out the storm.