Many startup companies in the last decade have invested heavily in maximizing the value of their companies in a short term endeavor, so they can benefit either by selling them to larger corporations such as WhatsApp, or going public through the initial public offering (IPO) to raise more capital such as Facebook and Slack. In addition, the top management of these startups use both organic growth (e.g., expand the portfolio of products offered or maximize the outcome from existing products) as well as inorganic growth (e.g., mergers, acquisitions, or joint ventures) to increase the top-line of their firms, without looking at the bottom-line of the firm. Many of these companies are startups backed by strong and mammoth venture capitalists, where they can raise funds easily even if the business is unprofitable for a couple of years.
The uphill challenge that is facing these ambitious startups is the ability to survive during massive accumulated losses, and converting such a company into a profitable business while factoring for the increased cost of capital due to several years of losses.
In other words, investors or lenders will lose trust in the ability of the unprofitable business to make a profit in the foreseeable future. Therefore, the question that comes to mind is how can we balance between the aggressive growth strategy and profitability?
One example, of a startup company that was established at the beginning of the last decade is Uber Technologies, Inc, known as “Uber”, and is considered as one of the most successful startups of the last decade.
The management of Uber is investing intensively - at all cost- on expanding the revenue streams of the company, while facing steep accumulated losses since inception (Uber Technologies, Inc. IPO Prospectus, 2019). However, the failure of WeWork (commercial real estate company that provided shared workspaces to other businesses) to go public during 2019, alarmed all unprofitable firms, As Morgan Stanley Equity Strategist - Michael Wilson said ( 2019) that WeWork might end the trend of unprofitable companies raising huge capital when he cited “the days of endless capital for unprofitable businesses is over”.
Also, Mr. Wilson cited three examples of trends that were ended (Martin Howell, 2019) “United Airlines’ failed leveraged buyout in October 1989, which effectively ended the LBO craze of the 1980s; the AOL-Time Warner merger in 2000, which indicated the dot com bubble was coming to a close; and JPMorgan Chase’s take under of the failed Bear Stearns investment bank in 2008, which signaled the end of the financial excesses of the previous few years”.
Even though innovation requires investing in risky and crazy ideas, ignoring the profitability factors of any business will cost it to exit soon.
Therefore, there should be a balance between the growth strategy and profitability for any business to survive especially during challenging times.