Is Profitability More Important Than Growth?
The rapid growth in Indian start-ups has resulted in the emergence of several big brands in the technology and non-technology spaces that are redefining entrepreneurship and start-up market strategy. While many start-ups focus on creating a niche, expanding market reach, increasing profitability in their early years, others are in the run for making big impact through big spending, rising valuation, etc.
The important factor that all start-ups must remember is the need to maintain a balance between profitability and growth. It is crucial for any business to grow as well as be profitable in order to sustain and stay relevant in the marketplace.
With the business fundamentals being constantly redefined, defining your value proposition to the customer and staying relevant at different points; entrepreneurs are under constant pressure to continuously innovate. Likewise, product diversification in the form of new product line or offering new services is the norm.
At the operational level, there are different sets of challenges to make customer experience integrated and seamless. Staff productivity is an operational focus with company’s intention to boost their morale to sell more. Similarly, continuous investment in data analytics and accelerating investments in effective supply chain management – all forms a growth strategy.
Making a Decision Add to
Add to it the pressure of competition; you have a difficult decision to make whether to sustain market visibility or to scale up the business. A smart approach is to lead to the path of profitability when you approach the investor with a business idea. Consider total costs of marketing, scaling up and going international.
Going forward, identify a business plan that will help you follow the path of profitability. Being sensitive to incurring costs, having appropriate revenue projections and setting a timeline will drive you towards achieving your business goals.
Depending upon the nature of the business, and the complexities in the industry, the business plan has to be modified at different stages. The economic conditions can considerably drive the company expenses, as you may need a cash reserve to weather the storm of low sales or other issues.
While these are some initial steps towards ensuring a profitable business model; the dynamics totally change when the business progresses into more advanced stages. A product, which has a wider consumption base, will be flooded with opportunities.
A part of your profits needs to be invested in areas like marketing, which also happens at the expense of profits.
A robust investment will accelerate the pedal for growth.
A better access to investors will give a boost to the management team, which will also be affected by the product economics. Investor confidence helps in increasing the risk appetite of the management, which can go a long way in disrupting the nature of the business.
The NASSCOM report, “Startup India – Momentous Rise of the Indian Startup Ecosystem,” states that India’s startup ecosystem has witnessed a 100 percent growth in the number of angel investors, private equity, venture capitalists, along with an astonishing 125 percent growth in funding in 2015, compared to a year ago.
At present, the investors are also in a wait and watch mode, showing clear determination to be a part of the Indian growth story, which will be determined by how entrepreneurs manage to achieve the right balance between profitability and growth.
(This article first appeared in the Indian edition of Entrepreneur magazine (January 2016 Issue).