The Get-Big-Quick Fallacy

Excerpts from a Havard Business Review blog by Scott Anthony | 10:00 AM June 24, 2013

Is it better for a start-up to purse profitability initially, or go for growth? Advocates of that second, get-big-fast approach inevitably point to companies like Tumblr (the company founded by a high school dropout that Yahoo! just acquired for $1.1 billion before it had even $20 million in revenues) or YouTube (which was sold 19 months after its founding to Google for close to $2 billion), or other companies whose hyper-growth attracted suitors before a viable business model emerged.

But it's important to consider how incredibly rare these examples are. For every Tumblr there are dozens of companies that had some success but never broke through — and hundreds more that never really got out of the starting block. Research by Harvard Business School senior lecturer Shikhar Ghosh, in fact, has found that fully 75% of venture capital-backed startups — presumably the crème de la crème of the startup world — failed to return the capital invested in them to their investors (let alone generate positive returns).

Growth is great, but profits are more convincing proof of long-term viability. Sufficient profits make a business self-sustaining, inoculating ventures against the need to pry money from tight-fisted venture capitalists or often-skeptical corporate investors.

Harvard scholar (and Innosight co-founder) Clayton Christensen guides innovators to be "patient for growth, and impatient for profits." There are wonderful exceptions to this rule. The Apple iPad generated $10 billion in revenue in its first year (no patience required there!). Amazon.com has a massive market capitalization even though its thirst for investment seems unquenchable. Groupon went from nothing to $1 billion in revenue in two years.

As wonderful as these events are, they are exceptions. If you plan to be an exception, odds are you will be disappointed. If you plan for the norm and it happens that fortune smiles on you, at least try to remember the role luck played in your outcome when a young entrepreneur comes knocking for advice.