Should Startups Focus on Growth or Profitability?

by on Mar 2, 2016

ola-mini-growth-profitability-startupsAs the price wars and car wars go on, here’s a mobile marketing message I received this afternoon  about the latest development in the car aggregator space. Ola Micro, a low cost cab service from Ola costs a rupee less than its arch rival Uber’s UberGo.  Ola Micro will use Hyundai Eon, Wagon R and Datsun Go.

According to a TNN report, Rajiv Bansal, the chief financial officer of Ola said their focus at this time is on  growth rather than profits.

Bansal’s statement underscores the importance of the growth over profitability strategy.  In the initial stages of a subscription business, growth trumps profit, because the goal is to gain market share, which can be capitalized on at a later stage to increase profits via economies of scale and recurring revenues from the life of each customer.  Ola, which is valued at $5 billion, has 70% of market share already and operates in over a 100 cities, as opposed to Uber which operates in 26 cities.

Should startups focus on growth or profits?

The growth-first strategy is particularly helpful to first mover(s) in a space, provided they are well funded, as demonstrated earlier by Amazon, Groupon, Facebook and other “startups” from the past.  These companies were unprofitable for several years, but they gained traction and captured the market before others could even start entering it.

However, to be backed by investors, as these companies were, your product or service or platform has to be a really revolutionary one.

If your idea is not all that disruptive, or if you don’t have the support of investors or if you are a late entrant in a market that is already crowded with competitors, then a lean strategy that focuses on profits through organic growth would be a more suitable one than investing heavily on trying to grab market share.

What are your goals?

Ola’s Bansal said their current focus is on solving a problem.

Ola is therefore focusing on growth.

Ola hasn’t registered profits yet.

So, it also depends on what your goals and that of your investors are.

If your goal is to set up a business to make quick profits than change the world or become a household name, then the Ola or the Facebook strategy is not the one to follow. You need to focus on profitability.