Both of these outcomes are highly valuable for businesses. And most founders strive to position their businesses for maximum growth and sustained profitability. Unfortunately, we know that it is tough to attain both at the same time. Ultimately, it comes down to understanding the difference between the two and making an educated decision on when to shift your attention and resources to each one.
So, what is the optimal ratio between the two?
Exploring the rules of growth and profitability
Completing some online research will highlight numerous rules of thumb for assessing whether your B2B tech startup has the right growth-profit balance. The now famous “Rule of 40” suggests that a successful SaaS startup’s growth rate plus profit should add up to 40%. This means if you’re growing at 60% per quarter, you can afford to lose 20%.
The basic idea is that early-stage startups should aim for high growth, prioritising unit or cohort profitability, not overall company profitability, as the company invests in product and service development and scalability.
Growth
There’s organic growth and growth by acquisition or partnership. Usually, for a B2B tech startup, organic growth will be the priority. That can include increasing the workforce, expanding the customer base and increasing the volume of sales.
However, with this comes increased risks and additional obligations, and with fast growth and rapid expansion, businesses can run into problems with maintaining quality.
Research shows that 93% of B2B tech companies fail to reach Series A funding.
To run a successful startup that will last, you have to learn how to measure startup growth.
In light of recent economic and market conditions, most notably the implosion of WeWork, growth isn’t enough to attract investors anymore.
Profitability
Profits are vital to every business, and it’s no surprise that most entrepreneurs seek to become profitable quickly. Unfortunately, only two in five startups are profitable, and other startups will either break even (1 in 3) or continue to lose money.
Sometimes, achieving true profitability comes at the expense of growth. Instead of reinvesting profits into sales, marketing and employees, founders use profits to build the bottom line and net cash.
For a new startup, one of the most significant advantages of focusing on profitability is maintaining financial stability without relying on outside investment.
Finding the right strategy to balance growth and profitability
Startup founders need to strike a balance between growth and profitability to secure investment and sustainably grow their business.
Some of the key ways to strike the right balance include:
Cash flow – as a general rule of thumb, it is recommended that you should have enough cash saved up to cover a minimum of 6 months’ worth of expenses.
Cash conversion cycle – analyse the time (days) it takes from e-signature to invoice sent and to the invoice being paid; decreasing this time will bring new much needed cash into your business and fuel your growth.
Establish targets – set a minimum profit level and allow for growth-focused investments with any profits exceeding that target.
Market fit – it’s important to generate revenue during the early stages, to verify that customers will pay for your product.
Cost-to-serve equation – this analysis will pinpoint exactly how profitable a particular customer will be and which ones may generate losses for the business. Then you can establish the value of that customer and weigh that against the risks.
Customer referrals – asking your existing customer base for recommendations means new customers can be secured with minimal investment; even if referral fees are due; it’s when you receive the revenue. A strategy like this will help to grow the business and generate profits simultaneously.
All sized companies need to be agile and learn when to shift their focus between growth and profitability at different life cycle stages. At Sales for Startups we work with Pre-Seed to Series A startups to create comprehensive agile strategies to support overall goals.
To find out more book a consultation call with our team.