Growth vs profit: The ultimate conundrum
A staggering 66% of startups have less than 12 months runway and 39% have less than six. These bleak statistics paint a somewhat gloomy picture and yet, in the UK alone, we saw a steady 8.5% increase in the number of companies being registered last year, so these figures are certainly not deterring the business leaders of today. Here James Hyde, CEO and co-founder of James and James, explains more...
One of the fundamental reasons for these grim statistics is that many leaders fall into the trap of trying to push for growth and profit simultaneously, but often lack the knowledge and insight on how to successfully achieve this.
The ‘Dragons’ Den’ approach
Consider the traditional business school approach of starting a company. You’ve created your ‘big’ idea and a business plan. You then pitch to investors in a ‘Dragons’ Den’ styled environment, after which you hopefully come home with the cash investment you need to kick start your business and enable it to grow.
You then repeat this process a few times and hope for an IPO at the end. At this stage, investors don’t care about current profits; they just want to know how you will make a profit further down the line when they decide to sell out. However, this doesn’t necessarily mean you should ignore profit to start with and focus on growth. Let’s look at the drawbacks of not making profit.
Blunt as it is, it’s really a do or die situation. A lot of companies fail because they run out of cash. Without profits, your business is solely reliant on continual investment. And, you’re not only running out of cash - you’re running out of control. The value of the company may be increasing from an investment perspective, but the value of shares will be decreasing and eventually, you will dilute the company so much that you no longer have control.
The two-step approach
With the right approach, you can grow your business and be profitable. In the last 12 months, our profits have increased by 145% and our five-year Compound Annual Growth Rate is 108%. So, how did we build high growth from profits alone?
In short, we focussed on two things: quickly identifying a product that customers would pay for; and cutting out unnecessary expenditure. Many entrepreneurs think you can’t win clients or build a company without shiny things. In reality, if you have the right idea and are willing to invest in only what you need, not what you’d like, both growth and profitability are possible.
Identifying what customers would pay for
Ten years ago, James Strachan and I were struggling to find a modern fulfilment provider for the eCommerce business we worked for. We had an idea to move away from the pen-and-paper approach of traditional logistics firms and develop a more dynamic, real-time solution. Our vision was an all-singing, all-dancing cloud-based system, to help clients keep on top of orders and stock control.
We developed a minimum viable product and contacted people in our network to try to sell it. A fundamental flaw in our idea was that people were not interested in just the software; they wanted a more complete fulfilment service. So, we hired a corner of a warehouse and used our technology to provide that service. This quickly generated profits, which we reinvested back into the technology.
Cutting out unnecessary expenditure
An interesting and challenging time, we found some novel ways of doing more with less, stretching our cash profits as far as we possibly could. For example, when the new labels didn’t fit in the printer, we didn’t simply go and buy a new printer; we modified the old one with two cans of paint to feed the roll of existing labels through. When we ran out of office space, we didn’t decide to invest in a bigger office; we converted the ladies’ toilets.
A product is not inferior simply because it’s developed on a shoestring budget. If you have a solid USP, clients will only interest themselves in the benefits. But satisfying clients isn’t the only hurdle to overcome.
Attracting the right people
The next challenge in nailing your profit-driven approach is staff. It can be difficult to attract the right people on a budget. Unsurprisingly, few people want to work in a low-paid job within an ‘underinvested’ company. This means you’re generally hiring behind the curve, not ahead of it, but what you can offer is culture; something that shouldn’t be overlooked in today’s mindful society. Furthermore, your management team will likely be made up of less experienced, junior people, which means that you will most definitely be wearing more than one hat and working long hours.
With investment comes expertise, advice and a valuable network. You will of course need the latter, but if you’re looking to grow organically you will need to find this elsewhere. Writing a business plan ten years ago to pitch to several business angels, I wasn’t necessarily after the cash investment – I was looking for the relevant expertise. Although our angel investor, Peter Cowley, didn’t come with a shiny halo, he was very well connected, with the business expertise to match. Peter has since made 100x return on his investment.
So where are we now?
It’s safe to say that we’ve come full circle. Ten years ago, we thought we were a software company. 2020 will see us launch our second major client for SaaS with several buyers now approaching us for our software and processes. We’ve also been named in the top 100 fastest-growing companies in the UK and top 1,000 in Europe - proof itself that you can have growth and profit. Although it has been a long process, we recognised that it would be foolish to move into an already crowded software market before we had cemented our USP and tested our software.
We are now closing our first private equity investment - through choice not necessity. This time, it’s about increasing our expertise, network and business maturity to take us to the next stage of growth.
For any business leaders who are facing this growth vs profit conundrum, whatever you decide, make it an active choice. Trying to maximise both at the same time is a fool’s errand. Profit is key to basic financial survival, but growth is key to profit and long-term success. There is a high chance organic growth will work best if there is existing competition and your product has a genuine USP. Often, profitable growth is the better choice, it just doesn’t make the headlines like big bang growth can.