- February 1, 2016
- Posted by: Jack Hudson
- Categories: Finance, Investment Strategies
Today I’m going to play a very thorny, ambiguous topic that generates heated debates … but I think worth comment and discuss its impact on the future of startup: the popular wisdom says you have to try to find income as soon as possible, something I do not think it’s as absolute as it depends on each startup, its business model … etc.
In case there is any doubt, I’ll start with a very clear statement about what I think:
Focus on profitability not always the right answer.
A startup is an experiment designed to discover a model of profitable and repeatable business scalable.
And the key here is the bold words: there is a business and should be managed as such, but an experiment where they do not know which is the best business model to exploit a customer need, which implies it first (even before to ask if profitability or growth) ALWAYS should be to create a product that really get add value (and thus keep users) … but once that is done, we worry about the scalability of the business model.
That is, for me the correct cycle in many cases (not always) is:
Retention (Value) -> Growth (Volume) -> Monetization (Return)
In order to experience and test with your users and check if they perceive value or not what you do, you’ll need a minimum number of users … but resists the temptation and do not continue to grow once the volume has been reached, since any spending growth before being validated if your product really adds value is a waste .
When and why focus on growth in lieu of return?
Often motivation on whether to focus on growth depends on three important factors:
What kind of business model going to use?
One of the basic criteria to decide whether to focus on growth and monetization is the type of business model that will run (freemium, marketplaces or more sides … etc.) and who the customer (B2B, B2C, B2B2C ..), the market size, investment, competitors speed … etc.
All these factors combined will tell us whether it is better to focus on growing (models with network effects as freemium, marketplaces … etc), focused on B2C, large markets / or profitability (sales business models, business focused B2B / B2B2C … etc).
What is our ambition or strategy?
Like many other things, what we aspire to and achieve long-term strategy of the company will determine whether to focus on growth: The largest and most interesting cake is not necessarily the most easily achievable, and usually it requires taking risk and wait longer … because they are usually more travel models / scalability but also much more complex.
You may also like to read another article on HeyGom: How a startup is valued and what impact it has on your future?
What is our goal as founders?
Derived from the previous point, it all really about our motivation to mount the startup, since between these two extremes there are many intermediate points:
- Riding a very scalable business -> Your goal is to work hard for a few years to not have to do more if you want.
- Create a business “lifestyle” -> To live as we wish, spend more time with family / friends and work on what we like without great economic aspirations
The decision on whether to focus on growth and profitability has an impact important in the future of the company, because if you opt for growth will be a cost that will be paid … which usually involves choose to seek investment business angels, funds venture capital funds or even lines of participatory loans.
7 reasons why the focus on income can be dangerous
Surely at this point many are still skeptical with the thesis of this article: why one or the other can we not try to grow and to focus on earning while?
Every time you write more about growing, growth hacking and stuff, but I think we should look at it from a strategic point of view and focus on what to us comes to us better, but absolute cigars are never good, and testing monetization definitely It will be useful to validate the business model, there will come a point to make a decision: or adjust the model to refine the profitability or growth.
The important thing is to choose one option or another, there is a “bad” we only understand its implications, even as revenues have their “bad” side:
- The management of the entire revenue process requires time and resources that are not dedicated to the capture of value and growth, something that is bad idea very scalable business models.
- The process is not immediate: Investing in growth does not mean that automagically it occurs, but usually spends time (up to one year!) to bear fruit
- In markets with few competitors or where you have the advantage of being first is more important to capture the maximum market share rather than growing slowly and focusing on revenue
- Generates dependency: As key metrics startup that is, we should try to make it grow each month (top right), which makes him devote more time and attention, besides creating a kind of “slavery” that the long us
- If we are not in a market B2B (smaller, slower sales processes but with more volume per transaction) whether to focus on revenue growth and may jeopardize our leave room for competition
- In business models where they occur network effects, i.e. those that the larger the larger user base is the value they receive (as models freemium, marketplaces / various sides … etc) to focus too early in the monetization can reduce growth rate, and therefore the value to users (which will damage the medium term revenues).
- The most important: The loss of a much larger objective of income (global maximum) for finding short-term results more easily (local maximum)
You may also like to read another article on HeyGom: Analysis of profitability in the company
These are some of the considerations that we have to consider … but be careful, investing in growth has a B-side financing related to our own that we know and accept:
- We opted growth: Failure to put the focus on profitability in the first place means that we will need sufficient capital to fund our losses, until the investment actually starts to bear fruit
- We opted profitability: But if we focus on profitability and tried to embrace bootstrapping from the beginning we will have more independence and ability to adapt and survive when things do not go well and have problems … something especially valuable in turbulent times
Does this mean that we should not worry in monetizing, and that what is important is to pursue your vision? Or joke. What he means is that monetization should be a decision meditated on startup strategy, and should happen when it makes sense … and this is sometimes after having focused on growth, and sometimes it ASAP.
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