Maximising Profit or Revenue
As a high growth challenger business it is sometimes hard to know how to balance the conflicting challenges of optimising for revenue, profitability or cash. This tension comes into play when planning a strategic path for your business. Operationally the need to avoid running out of cash will of course trump other prerogatives.
I have a simple rule of thumb for addressing this question and it’s determined by market opportunity.
If you compete in a very large market with relatively low barriers to global expansion; and gaining leadership in that market would be extremely valuable and has some probability of being achieved, this market is likely to become competitive and populated by well-funded businesses and you should consider optimising for growth. Only the highest growth Companies will attract equity funding so its important that you are well placed. A claim that is valid, but not that useful, is that you have achieved your position with less capital than a competitor.
Investors often use the £100m ARR lower end benchmark for assessing whether you have this type of opportunity.
Even if it turns out that you want to be acquired before you achieve a significant share of this potential market, growth will likely be valued as highly or more highly than profitability, as its crucial for strategic buyers that you can make a meaningful contribution to their business (as opposed to being earnings accretive in the short-term).
If on the other hand you operate in a market that is limited by geography, value, regulation, speed or economic model profitability you should consider optimising for profit. It could be that this type of market attracts relatively limited competition or well funded competition in any event, in which case you should not be in a massive hurry. Or alternatively it could be that barriers to entry are low and that only a limited number of Companies can survive in this type of market – in this case building cash & equity value places you in a strong position when the industry consolidates.
When it comes to equity funding it can be hard to raise high quality venture or growth equity for markets limited in potential. When it comes to an exit, strategic buyers can be attracted by niche players, but often they will think about valuation in terms of EBITDA. There are lots of financial buyers around looking for good businesses to invest in but they too will focus on profitability.
I find this useful for framing the choice of strategic imperative of profit v. growth.