(Expansión) – Given the global environment in which valuations have been adjusting —and it seems that “later stage” investors have become more risk averse—, a conversation I have had with entrepreneurs is what is better as a startup, prioritize your growth or your profitability?
Like many of the questions in the nascent ecosystem, this is one of the questions in which one asks, what came first, the chicken or the egg? It is obvious that the purpose of every company is to have profits, but it has been shown that to have them you have to grow, whoever does not grow loses market, opportunities and in the end is not profitable.
In the last 20 years, with the boom of the digital era, and the financing of venture capital, the bet has been to grow by over-delivering profits, buy the competition and monopolize most of the market, and then make a profit.
In the podcast that I do, Read to Lead, we read the book ‘The Cold Start Problem: How to Start and Scale Network Effects’, and one of the tips that stuck with me is: “when you have a problem of which came first or the chicken, what you have to do is buy the chicken!”
Indeed, that is what many have done, like Facebook, today Meta. When he found himself in this dilemma, what he did was buy chickens that lay the golden eggs like Instagram and WhatsApp, which helped him leverage himself in the world of selling data and advertising to users.
The same has happened with Uber, although in the last quarter they reported a cash flow of 382 million dollars, they continue to report losses; Even so, it has continued to invest in the purchase of mobility startups such as Zomato (in which it has just sold all its shares), Aurora and Grab, which have implied losses before reporting profits.
In view of the current global “economic recession”, in which there is NO unlimited money for startups, the tone is changing. You have to be more effective than efficient, and those who hired the best IT teams in a frenzy are now letting them go. They are choosing to keep cash flow and profitability over growth. Without a doubt, that is what many strategists ask to be done in these times.
Maybe Uber and Facebook can afford to stop growth for a moment, Google can stop hiring for two months. But many of the companies that are barely consolidating in Latin America do not have that privilege, the condition of continuing to grow, although this must be done with caution. Because there are still opportunities to expand where he who hits first hits twice.
According to an article from 2005 that still seems relevant to me, growth is more valuable in the long run than profit. “At first glance, a point of profit margin seems much more valuable: 100% of the additional margin goes down to the bottom line, while only 7-8% of an additional point of growth turns into profit. But savvy entrepreneurs know that growth has a compounding effect over time that amplifies long-term profit. […] Growth is often much more valuable than you think. And it is a mistake to assume that profitability must always be sacrificed to achieve growth (although there are certainly cases where this is the case). For some companies, growing just one extra percentage point can be worth six, seven, or even 10 points of extra margin.”
The truth is that both factors are inseparable. To be successful and stay in business, both profitability and growth are important and necessary. Profitability is, of course, critical to a company’s existence, but growth is crucial to long-term survival.
I understand that today the mantra is cash is king , but I also believe that each company is unique and must make these decisions with much greater caution, but without missing out on growth opportunities that can determine the future survival of a company.
As a founder right now, where having built a solid cap table with experienced and committed investors, is a great differentiator. Undoubtedly, times call for spending discipline and extending the runway as much as possible, as long as it does not compromise the company’s competitive position and therefore risk its success, and even its existence, in the medium term.
In conclusion, I could say that although these are times of care, they are also times for courageous, those who manage to grow in the recession will be the ones who hit twice.
Editor’s note: Fabrice Serfati is a Venture Capitalist expert in disruptive businesses in Latam, Managing Director and Partner at IGNIA Fund, mentor of brave and outstanding entrepreneurs. Creator of the #ReadToLead podcast and the Founder’s Book Club. Follow him on and/or on . The opinions published in this column belong exclusively to the author.
