Jeff Bezos has made his story famous in the tech industry by running Amazon with a steady increase in revenues and zero profit for decades. Part of the investment community initially believed that its thin margins were an indicator that it wasn’t sustainable over the long term. It is now widely acknowledged that Amazon was the first e-commerce company to profit by reinvesting every penny it earns for the past two decades.
Markets with low marginal costs (the price of adding one more customer) and strong networks effects (the business’ offering becomes more valuable the more people who participate in it, often platforms) are a winner-takes-all economy. Direct competitors can’t generate enough value to offset the market leader’s accumulated network effects.
These markets require rapid growth. It is possible to be overwhelmed if you take things slowly and only one step at a while. Being the market leader is essential in a game with only a few orders-of-magnitude differences between first and third.
Many startups and their investors realize this, and many make colossal growth and rapid expansion losses.
If you’re trying to establish a monopoly in an area with strong network effects, this behavior is rational. It doesn’t, however, mean it is sensible for all new businesses. Few are the Amazons, Ubers, and AirBNBs of the world.
Your company must be able to compete in a competitive market. If you are working in a traditional market, it can be risky to sacrifice profitability for rapid growth. Need adverse events can push your company over the edge. The growth gains you’ve made might not be worth it in the end because better offers could surpass them.
It doesn’t make economic sense to contribute extra for success in such markets. It’s better to be conservative in your marketing and financial strategies.
Remember that the term start is too often used these days. However, not every startup is a startup. Many businesses are not startups. Paul Graham said that startups equal growth.
A consulting IT firm isn’t a startup. Instead, it grows linearly. Therefore, it makes no sense to sacrifice profitability for growth.
However, if the IT company creates a digital product with high scalability (low marginal costs), it is a viable startup project.
If the digital product can benefit from strong network effects, then investing in the growth of the company is a brilliant idea and highly necessary. Taking the VC route is the standard way to fund the development.
In conclusion, if growth is your goal, you need to make sure that you are in the right market.
