Profitable Growth vs. Fundraising: The Smart Business Strategy You Need to Know
Discover why it's time to shift your business focus from fundraising to profitable growth. Learn how to build a sustainable, successful company and avoid the pitfalls of chasing funding rounds.
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It's common to see companies celebrated and applauded for raising millions of dollars in funding. The media is quick to herald such achievements, with headlines proclaiming the latest unicorn to secure a staggering $20 million in investment. However, what if we shifted our focus from fundraising to profitable growth? Shouldn't we be equally, if not more, impressed by companies that generate $20 million in profit? This article explores the notion that our obsession with fundraising is misplaced and argues for a shift toward emphasizing profitable growth.
Fundraising vs. Profitable Growth
The current trend
In recent years, the startup ecosystem has been dominated by a culture that places excessive importance on fundraising. Entrepreneurs are constantly under pressure to secure funding to scale their businesses, often at the expense of focusing on profitability. This trend has resulted in an environment where startups are valued based on the capital they raise rather than the value they create.
Let's consider the case of 54gene, which raised close to $50 million in funding but never achieved profitability. They spent heavily on research, and questionable spending by the company’s former executives. however, despite their impressive $45 million figure, they ended up shutting down due to unsustainable losses.
Problem with glorifying fundraising
Glorifying fundraising has its downsides. It creates a culture of dependency on external funding, which can lead to overvaluation and unsustainable business models. Startups are often in a constant cycle of raising funds without a clear path to profitability. This can be detrimental in the long run.
A company we worked with on our agency side Wizz Digital Marketing, secured $30 million in funding rounds over three years but remained unprofitable. As a result, their investors began to lose confidence, and they struggled to secure additional funding. The company had to downsize and shift its focus towards profitability to survive.
Think of Theranos, A biotech startup led by Elizabeth Holmes, Theranos raised nearly $1 billion for its blood-testing technology. However, the company faced allegations of fraud and issues with the accuracy of its tests. Theranos eventually dissolved, and Holmes faced legal consequences.
The Media's Role
One of the driving forces behind this obsession with fundraising is the media.
It's no secret that headlines love to showcase the latest multi-million-dollar funding rounds. The problem is that this celebration often overshadows the more significant achievements of companies that have found ways to generate substantial profits.
When a company raises $20 million in a recent funding round, it will make headlines across tech and business news outlets. However, if another company quietly generates $20 million in profit in the same year, it will barely receive any media attention.
It's perplexing that companies making $20 million in profit can go relatively unnoticed while those securing a similar amount in funding receive immense attention. This burstiness in media coverage can mislead entrepreneurs into thinking that raising capital is the ultimate goal, rather than building a sustainable, profitable business.
Consider the case of a company, that consistently turns a profit year after year but receives minimal media coverage. While their business grows steadily, it remains out of the spotlight because it focuses on profitable growth rather than fundraising.
Another vanity metric of growth that we need to discuss with entrepreneurs is revenue. It is a measuring stick in the startup space that can be misleading.
The Vanity of Revenue Growth
Revenue without profit
Many businesses focus solely on revenue growth, considering it a key metric of success. However, revenue without corresponding profitability is essentially an empty number. Its burstiness without substance, is a case of high revenue masking underlying financial issues.
There is a company I was once contracted to consult with, they boasted a $30 million annual revenue, but their expenses were equally high, resulting in zero profit. This misalignment led to financial stress and a subsequent inability to sustain the business in the long term.
Unsustainable business models
Some companies even spend more than they earn to boost their revenue numbers. This burstiness in revenue is often achieved through aggressive marketing, discounts, or excessive spending. In the long term, such practices are unsustainable and can lead to the downfall of businesses.
We have worked with a D-Commerce business that offered deep discounts to attract customers and boost their revenue numbers. While they did achieve impressive bursty revenue growth, they couldn't sustain the discounts and eventually faced severe financial challenges.
Getting Back to Fundamentals
The importance of profitability
It's time to shift our focus back to the fundamentals of business. Profitability should be at the core of every company's strategy. Profit not only sustains a business but also allows for reinvestment and growth without being dependent on external capital.
There is a company we were privileged to partner with that prioritized profitability over fundraising. They reinvested their profits to expand their product line and reach new markets, gradually achieving sustainable growth without being at the mercy of investors.
Building a sustainable business
Rather than chasing after funding rounds, companies should prioritize building a sustainable and profitable business model. This approach might be less bursty in the short term, but it leads to long-term stability and growth that isn't reliant on the whims of investors.
One thing I appreciate about creative entrepreneurs in the digital business space is that most start with a lean approach, focusing on profitability from the beginning. Over time, they attract customers and investors who appreciate their sustainable business model, leading to steady growth and lasting success.
It's evident that our current culture of glorifying fundraising, while neglecting the importance of profitable growth, is in need of reevaluation. While fundraising plays a vital role in scaling businesses, the relentless pursuit of funding at the expense of profitability has led to numerous cautionary tales in the business world. The allure of high-value funding rounds often overshadows the far more enduring achievement of consistent profitability.
The real measure of a company's success lies not in the millions it raises but in the sustainable profits it generates. Profitability isn't just a financial metric; it's the lifeblood of a company. Profit sustains operations, empowers reinvestment, and provides a cushion against economic downturns or market shifts.
When we celebrate companies for their fundraising feats, we inadvertently perpetuate the myth that raising capital is the ultimate marker of success. However, in reality, the sustainability and longevity of a business depend on its ability to turn a profit. A profitable business doesn't merely rely on external investments; it's self-sustaining, providing a secure foundation for growth and innovation.
By focusing on profitability, businesses can mitigate their reliance on external capital and make sound decisions to ensure long-term viability. This shift may not result in explosive growth or bursty headlines, but it paves the way for sustainable expansion, financial stability, and true success in the long run.
To build a sustainable business, it's crucial to recognize that the pursuit of profitability isn't an alternative to growth but a complement to it. Companies that prioritize profitability are better equipped to weather economic uncertainties, adapt to changing market conditions, and withstand challenges that could otherwise prove insurmountable.
In the end, it's time to strike a balance between fundraising and profitability. While fundraising can serve as a means to an end, the ultimate goal should be the creation of a business that can thrive on its merits. As entrepreneurs, investors, and consumers, we should shift our perspective, redirecting our applause and recognition toward businesses that achieve the delicate equilibrium of both raising capital and nurturing profitability.
So, the next time you come across a headline hailing a startup's latest funding round, remember that the real achievements lie in those companies quietly turning profits, and building the foundations for lasting success. It's time to stop glorifying fundraising and start encouraging businesses to embrace profitable growth as the ultimate hallmark of excellence in the modern business landscape.
1. Is fundraising bad for business?
Fundraising isn't inherently bad, but when it becomes the primary focus at the expense of profitability, it can lead to issues.
2. Why is profitability more important than revenue growth?
Profitability ensures a business can sustain itself and grow without being reliant on external funding. Revenue growth without profit is unsustainable.
3. How can a business achieve profitable growth?
By focusing on creating value, managing expenses, and building a sustainable business model that generates consistent profits.
4. What's the role of the media in glorifying fundraising?
The media often highlights fundraising successes, contributing to the perception that it's the ultimate achievement in business.
5. What are the risks of ignoring profitability in pursuit of fundraising?
Ignoring profitability can lead to unsustainable business models and overreliance on external funding, which can be detrimental in the long run.
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About The Contributor
Tanya Kabuya is the founder of Wizz Digital, a South Africa & Nigeria-based marketing strategy consultancy that assists Tech Startups & consulting businesses to grow their audiences, attract clients, and cultivate brand recognition through social media by deploying the Content Marketing Ecosystem Playbook, our proprietary Framework. Find out more and explore the advisory academy as well