Is Sacrificing Profitability In Favor Of Growth A Good Idea For All Startups?
The story of Jeff Bezos running Amazon with ever-growing revenues and zero profits for decades has become legendary in the tech world. Initially, a part of the investment community believed that its razor-thin margins are a sign that the business is unsustainable in the long run. Nowadays, however, it’s widely accepted that reinvesting every single free penny into the business for two decades was the key strategy that made Amazon the world leader in e-commerce.
The market of businesses that have very low marginal costs (the cost of adding one additional customer) and strong network effects (the offering of the business becomes more valuable the more people participate in it, usually platforms) is a winner-takes-all economy. The market leader becomes a monopoly, and direct competitors simply cannot generate enough added value to overcome the accumulated network effects of the leader.
For such markets, rapid growth is not only desirable but often necessary. If you decide to take it slowly, one step at a time, you are risking that a competitor who is highly capitalized and investing aggressively in growth would surpass you. Naturally, becoming the market leader in a game where the difference between first and second place could be a few orders of magnitude is crucial.
Since a lot of startups and their investors realize this, there are plenty of startups that are not only operating with zero profits, but with massive losses in the name of growth and rapid expansion.
If you are trying to build a monopoly in a market with strong network effects, this is rational behavior. This doesn’t mean, however, that it is rational for any new business. The Amazons, Ubers and AirBNB’s of the world are few.
Read More at www.forbes.com/sites/abdoriani/2021/08/03/is-sacrificing-profitability-in-favor-of-growth-a-good-idea-for-all-startups/amp/