In the last 20 years, with the boom of the digital era, and the financing of venture capital, the bet has been to grow by over-delivering profits, buy the competition and monopolize most of the market, and then make a profit.
In the podcast that I do, Read to Lead, we read the book ‘The Cold Start Problem: How to Start and Scale Network Effects’, and one of the tips that stuck with me is: “when you have a problem of which came first or the chicken, what you have to do is buy the chicken!”
Indeed, that is what many have done, like Facebook, today Meta. When he found himself in this dilemma, what he did was buy chickens that lay the golden eggs like Instagram and Whatsapp, which helped him gain leverage in the world of selling data and advertising to users.
The same has happened with Uber, although in the last quarter they reported a cash flow of 382 million dollars, they continue to report losses; Even so, it has continued to invest in the purchase of mobility startups such as Zomato (in which it has just sold all its shares), Aurora and Grab, which have implied losses before reporting profits.
In view of the current global “economic recession”, in which there is NO unlimited money for startups, the tone is changing. You have to be more effective than efficient, and those who hired the best IT teams in a frenzy are now letting them go. They are choosing to keep the cash flow and profitability over growth. Without a doubt, that is what many strategists ask to be done in these times.
Maybe Uber and Facebook can afford to stop growth for a moment, Google can stop hiring for two months. But many of the companies that are barely consolidating in Latin America do not have that privilege, the condition of continuing to grow, although this must be done with caution. Because there are still opportunities to expand where he who hits first hits twice.
According to a 2005 article that still seems relevant to me, HBR that talks about the Relative Value of Growth , growth is more valuable in the long run than profit. “At first glance, a point of profit margin seems much more valuable: 100% of the additional margin goes down to the bottom line, while only 7-8% of an additional point of growth turns into profit. But savvy entrepreneurs know that growth has a compounding effect over time that amplifies long-term profit. […] Growth is often much more valuable than you think. And it is a mistake to assume that profitability must always be sacrificed to achieve growth (although there are certainly cases where this is the case). For some companies, growing just one extra percentage point can be worth six, seven, or even 10 points of extra margin.”
The truth is that both factors are inseparable. To be successful and stay in business, both profitability and growth are important and necessary. Profitability is, of course, critical to a company’s existence, but growth is crucial to long-term survival.