Interesting piece by Rob Wheeler at HBR Blog Networks that uses Groupon’s silliness as a starting point for a great discussion on profitability and growth. From Wheeler:
Clayton Christensen would agree with the intuition that Groupon displays but ignores: businesses should become profitable before they become big. The best way to manage a fledgling business is for managers to be impatient for profit but patient for growth. Such a strategy limits an early venture’s funding in order to force the business to develop a profitable business model and then invests heavily in growth once such a model is identified — Christensen terms such investments “good money” for incubating growth businesses and extols the strategy for three reasons.
First, when a business is impatient for profit, managers are forced to validate their assumptions and demonstrate that customers are fundamentally willing to pay an acceptable price for the company’s offering.
Secondly, expecting a business to be profitable quickly forces it to keep its fixed costs low. Because a business’s cost structure determines which customers it finds profitable, keeping these fixed costs low preserves strategic options for the company when it is choosing which customers to target.
Finally, reaching profitability quickly ensures that when outside financing dries up, the venture can succeed on its own.
The full piece is worth reading and thinking about. I will be sharing with students in my New Venture Creation class.