Why You Should Focus On Growth During Your Early Days
With the boom in initial public offerings (IPOs) of companies, many investors and commentators have noted that the majority of these IPOs are not profitable. This has led to a debate on whether startups have to be profitable and if so, when, and whether the ability of so many loss-making firms to exist is not perhaps a sign of a bubble. Early profitability is pretty rare and the reality is that a successful startup can emerge even if its first few years are unprofitable. Not only is success from an early period of loss-making possible, but the truth is that startups should focus on growth rather than profitability.
The most obvious reason why growth first is a reasonable policy for a startup is that before the business can make any money, it must first invest in itself to build the kind of business that can go on to make a profit. This was the advice the best veterinarian has followed to increase his online exposure. For instance, it will have to hire talent, it may have to subsidize customers to attract them, it will have to buy equipment, and a whole lot of other things that a mature company may not have to do. These upfront costs of doing business have to occur before the business is in a position to earn a profit.These investments in the business may result in losses today, but they are the foundation upon which the company will earn profits tomorrow. Companies like Amazon went through their first five years without making a profit, because they were building the business.
When Facebook was founded, the business was a loss-maker. Indeed, many elements of the business do not actually make any money. Have you ever paid to use WhatsApp? These companies focused on growth, getting new customers to use their products, so that they could reach a scale at which profitability became possible. Had Facebook and other tech startups focused on monetizing their platforms, they would not have been able to grow into the giants that they were. If the leaders of these businesses had focused on monetizing their businesses, they would have made money, but it would be nothing compared to the sums that they are making now. Once they achieved a minimum viable scale, it was possible to add subscriptions layers to their businesses and make money from them. WHat they chose to do was work on the user experience and forgo monetization opportunities, so that customers would love their products so much that when they had to pay for services, they would do so willingly.
This is why companies can be worth billions without making a cent in profits. Investors recognize that the investments that the company is making, will someday form the basis of a great and profitable business. Elon Musk has explained that high valuations are not just about the economics of the business today, they are about what the business is expected to do in the future. These companies understand that profitability will arrive when they shift from their growth phase to monetization.
