Over the past several years, we have enjoyed one of the longest bull markets in American history. This period of expansion, coupled with low interest rates, has allowed companies to borrow cheaply and use those funds to grow their businesses.
Investors and shareholders have gotten used to double-digit growth rates and, in many cases, have demanded that companies keep growing, regardless of the cost and the lack of profitability (i.e., Growth at all Cost).
This ‘Growth at All Cost’ mentality has caused many companies to be blind to the fact that profitability is just as important and, depending on the industry or the stage of the company, it may be the only way to manage a business. On the other hand, “Growth at all cost” may be the right strategy, depending on at least these factors:
The bottom line is that the “growth at all costs” mentality makes sense if a company is in an early stage with a product that can change a given industry, with ample cash to burn for a couple of years and has the right management team that has developed a road to profitability.
The opposite is obviously true. I have seen many situations where the company has been losing money for 10 years with no more access to fresh capital, facing competition left and right and no road to profitability in the short run.
Let’s examine the case of Twitter which was founded in 2006. By 2010, the company had revenues of $28 million and losses of $67 million. The following year revenues grew by 278% to $106 million and losses mounted to $128 million. The company raised $1.8 billion during their IPO in Sept 2013 and is profitable as of H2 2022.
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Revolutionary product
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Social Media: Yes
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Stage
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Start up: Yes
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Access to funding
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IPO: Yes
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Path to profitability
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Positive Ebitda in Q2 2022: Yes
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CEO
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Elon Musk: Yes
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Rough Waters
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Ups and downs during Covid: Yes
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Unfortunately, not every business is going to be the next Twitter, Amazon, or Facebook. In 2021, there were a little over 1,000 IPOs and, on average, there are 72,560 startups per year. Not every company wants or will ever have the opportunity to raise capital in the public markets. For most of the startups, having a plan to get to profitability can make the difference between surviving or filing for bankruptcy.
Let’s take the example of Peloton. The company was founded in 2012 and it went public in Sept 2019 at a price of $29/share. During the pandemic, Peloton reached a high of $171/share. Unfortunately, the good news did not last long. The pandemic subsided and gyms across the country opened up. Sales have taken a dive over the past several quarters, production has suffered from supply chain problems, the company recently announced massive layoffs and the end result of all of these bad news is a share price of less than $8/share.
| Revolutionary product | Maybe |
| Stage | Start up: Yes |
| Access to funding | IPO: Yes |
| Path to profitability | Not yet |
| CEO | Fired |
| Rough Waters | Miscalculated the downturn after Covid |
In retrospect, Peloton was able to navigate a huge high tide at the beginning of the pandemic, but they were not able to perform at all during the low tide when the world opened up and restrictions were eased. I would more specifically question their road to profitability because over the past 5 years they have experienced lower margins; higher competition and overstaffing in many areas.
In summary, the growth at all cost strategy only makes sense under certain situations and it must include a good understanding of when and how the business will reach a profitable stage. The strategy of “growth at all cost” has a lot of merits under certain situations but is certainly not a “forever strategy”.
