82% of startups fail due to cash flow problems, according to Small Biz Trends. For such businesses, the simple boost from an investor might be all they need to poise their business for success. Sadly, most investors want to invest in something profitable, and there comes the dilemma.
The catch 22 situation is that you need to grow enough to embrace high profitability rates and attract investors while you still need funding from investors to grow your business. For most people with a great business idea, this might be a dilemma that they cannot escape. Sadly, it is close to impossible to concentrate on both growth and profitability at the same time.
Here is a guide for gauging which side to prioritize at first:
What Investors Do You Wish To Attract?
The choice trickles down to the investor that you would wish to attract. Most venture capitalists will be more than willing to incur short term losses for long term profits. For them, it is a choice of gathering up as much equity in your firm in its early stages to reap the benefits later on. If these are your dream investors, then you should prioritize growth.
On the flip side, private equity firms will mainly pay attention to the profitability of your firm, according to the invention guide. They would most likely need to see its profitability before choosing to prop your business using debt instruments. Furthermore, the profits from your business will be instrumental in paying back the interest on the debt that you borrow.
Use the 20/20/20 Rule To Determine Demand
For your business to be profitable enough and grow long into the future, you must be sure that its demand will not dwindle with time. The 20/20/20 rule can help determine your product’s demand. Ensure that you have the attention of at least 20% of the population through achieving one of their needs.
Next, make sure that this population will still need your product within a span of 20 years. Lastly, the product should at least be fairing well or be poised to fair well in at least 20 local or international markets. If your product fulfills this, then it might be easy to defend the growth of your products to potential investors. Most will be more than willing to support your path of either profitability or growth if demand is borderline certain.
Be Ready To Provide the Resources
If you choose growth, you ought to invest all that you can into the ideation process of your business. You need more ideas, more product tweaks and to work with people willing to move your business forward. On the other hand, if profitability is your goal, channel everything you have to improve the profit margin of your business.
This will include reducing costs and embracing strategies like lean management. Anything that might strangle the profitability of your organization should be avoided including instances of fraud or even delays in product delivery. In a nutshell, pay attention to the current situation of your organization and determine what you can best prop it up for – growth or profitability – using your current resources.
Everyone Needs To Be On Board
To fulfill either growth or profitability, all hands should be on deck. You need to communicate with the rest of the team on the short term and long term goals of your organization. They should know how to autonomously react to any change that will happen to the business a year or even three months from today.
With a workforce that is ready to prop your business up for success, it becomes easier to maximize profitability or growth. Any slight changes in the inclination of your business should be communicated to the employees quite early.
Growth will bar profitability and vice versa, which makes the co-existence of both business inclinations tough. Luckily, the choice depends on where your organization stands in terms of resources and the type of investors you want. Pay attention to the intricate details of your business to determine the best path forward.