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Value Creation Blog

Profits First, Growth Second

Posted by Josh Patrick

bubble pop 01 resized 600I just finished reading an interesting book on innovation called The Innovators Solution.  In the book there is an interesting question posed, “Do you need profits or growth first?”  Interestingly enough, the answer is it depends.  It depends on the culture and the needs of the investors.

Understand the needs of your investors.

If the investor is you, I bet you know the answer.  You must be impatient for profits.  If the investor is an outsider you need to understand their needs.

When you borrow money from a bank, it’s all about profits.  If you get an outside investment from a venture capital firm, it’ll be all about growth, at least in the beginning.  If you get money from family and friends, it’s probably confused and you don’t why they’re investing except they like and even love you. 

Helping your investors understand what your plans are is crucial for success.  If you believe profits are most important, at first you will grow more slowly.  If your investors need fast growth, get ready for a rocket-ship that you might lose control of.  It’s part of the risk you take in choosing fast growth.

If it’s your own money make it sustainable.

When you use your own money you don’t have a choice.  You must focus on profits.  I made the mistake of concentrating on growth and it took me over ten years to dig out from growth for growth’s sake.  If you’re not impatient for profits your venture can fail.

Don’t ever bet the store on any idea.  If you can’t afford to lose the money you’re investing you shouldn’t start in the first place.  When it’s your own money it’s always about risk management.  You won’t find any successful business owners who are high-risk takers. They all take risks and the risks that successful business owners take is always a controlled risk.

If your product is disruptive its all about profits.

If your new product or innovation is going to disrupt a method, service, or product you need to make sure it’s profitable from day one.  You’re not going to have the resources to continue to pour more and more money in.  Even if you’re venture capital financed there will come a time where they say enough and bring in your replacement.

It’s almost a sure bet that your disruptive product will grow more slowly than you thought and cost more than you budgeted.  You need to plan for this.  You need to have an early exit if it’s not working or you must learn the fine art of pivots.  The chances are your final product is going to look much different than your first concept. 

Don’t fall in love with your idea.  Sunk cost means you believe profitability is just around the corner.  If you find yourself in that position get out and get out quickly.

Sustainable growth is all about niches.

Sometimes you are fortunate.  Sometimes a general market product takes off and you’ll be able to stay in control.  Those aren’t the odds and that’s not what usually happens.

If you focus your ideas on a particular group of customers who have a special problem you can help solve you’re more likely to be successful.  A niche doesn’t have to be small; it just needs to be well defined.  Apple is the largest niche company I know.  They have a well-defined customer with a well-defined set of problems they solve.  Think like Apple not General Motors.

At the end of the day, you must be able to afford the investment.

Most of us in the private business world don’t have access to huge piles of cash.  We have to be able to afford the investment.  We’re not going to take private equity and a venture capital firm is not going to ride in and rescue us.  Our families and friends have very limited capital they can provide.  You probably haven’t saved an awful lot of money you can afford to invest.

This means that you have to be profitable and be very impatient for profits.  The longer you wait, the less you’ll be able to afford your new idea.  It’s that simple:  Profits must come and come quickly or you and your business could join the 95% of businesses that don’t exist five years after they start.

I’ve written a special report on a simplified budgeting procedure.  This report will help you easily go through your new idea and figure out what you need and what it’ll cost.  You can then see how long it’ll likely take before you reach profitability.  To get this report, click on the button below.

Click Here for your Report on theSimplified Budgeting Process

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Topics: profitability, value creation, innovation

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