Profit or Exponential Growth: You Usually Can't Have Both

Traditional methods of planning and forecasting new businesses are dramatically changing in nature and diversity. On one hand, traditional small businesses need to show profitability, at some point, so they can pay their bills and find investors. On the other, many new businesses like apps, sharing sites and new technologies require large scale, large investments, exponential growth and losses over several years to prove their concept. In addition, forecasts of these larger entities are generally meaningless because of the risk and uncertainty. VC firms are also looking for potential 100 million-plus entities while the small entrepreneur is frequently pleased with a million dollar entity that makes 10 % profit.

While goals, business, and energy account for much of the differences the characteristics of the entrepreneur and investor have a great impact. Some are just out of college, living at home, with a sort of unrealistic view of life. Others are venture capitalists (VC), like a shark tank judge, looking for the next billion dollar deal. Some are in their 30’s or 40’s with extensive expertise and experience, but with a need to make a living quickly. No matter what the background is, you still need to consider the goals, risk, competition, market size and growth, resources, experience, expertise, in developing a strategy.

We also need to focus more on the realities of different startups. Consider this:

The Kaufmann Foundation, a group that promotes business growth, estimates there are about 400,000 new startups every year and that 90% of them will fail before their fifth year.

There are also an estimated 131 startup companies in the last few years that have achieved over $ 1 billion of valuation led by Uber at 51 billion.

Thus, in about 5 years, the odds are that about 1 in 15,000 (2,000,000/130) that the company will reach $ 1 billion in valuation, and 1 in 10 (mostly small companies) that they will survive five years.

There are also significant variations in these outcomes. For example, small companies get bought or sold and many large companies succeed but have less than $ 1 billion valuations.

The key reality is that most of the billion dollar companies achieved exponential growth but also lost money over several years. For example, Uber is presumed to lose about $ 200 million annually. Similarly, virtually every new large startup shows dramatic increases in sales, but even more dramatic increases in losses. Even Amazon lost $ 241 million dollars last year but has a stock value over $ 400 billion.

There are some obvious recommendations for this dilemma:

Understand your goals, resources and risk. In particular really understand your market analysis, competition, and how and why your company is different, and why customers should care.

For small business owners, proper planning, adequate research, business excellence , well executed programs, and ensuring PROFIT are critical to being in the 10% that SUCCEED!

If you require exponential growth to ultimately succeed, you still need to understand metrics. No matter the size of your business, understand the risk and uncertainty, develop the resources or at least plans, assess the ultimate market and ensure there is at least a potentially profitable metric down the road.

In summary I have learned that traditional startup recommendations like planning, budgeting and expertise are not as important in startup businesses that require great scale, risk and uncertainty. In addition the incredible potential of these efforts may warrant the risk. However, they can still develop metrics and professional methods to accelerate the growth and mitigate the losses.