Growth vs profit: The conflict in UK startups

Hewitt, S. Hewitt, J. Atkinson, D: Growth vs profit: The conflict in UK startups      

2019 WEI International Academic Conference on Business, Economics, Management and Finance (Harvard Faculty Club 2019, Boston, USA), July 29-August 2,
2019

 

Abstract

This paper sets out to consider the conflict between growth and profitability within startups. Particular focus is on startup organizations here as the number of newly founded businesses is increasing exponentially, with records being broken year on year (Bounds, 2017).

Modern startups have recently been focusing on a high-growth model, particularly in the technology space, but this comes with high risk. Whilst the rewards can be significant, failure rates are also high. We are beginning to see high-growth firms succeed with the likes of Facebook posting a profit of more than US$10bn in 2016 (Facebook, 2016). However, newer firms are struggling financially. For instance, Uber made a loss of US$4.5bn in 2017 (Hook, 2018). Firms like Uber, are often labelled as 'unicorn startups'. These are defined generally as firms that have a market value of more than US$1bn yet are posting significant losses. These losses are not the only concerning factor. As according to The Economist (2015), many valuations of startups appear to be over-inflated due to their expected rapid growth. As a result, it is clear that there is an issue with the financial aspects of startups. This study aimed to understand why failure rates were high at the inception of a business, which leads into the exploration of growth vs profit at all stages of a business and how the two are potentially balanced. The result of this is the provision of a guide for newly-found startups to help ensure the likelihood of success.

In order to investigate the conflict between growth and profit, this study used two forms of research. The first of which was an online survey completed by 32 founders, managing directors/CEOs and/or employees of London-based startups. The overall objective of the questionnaire was to understand the trends within growing startups and explore the methods and strategies employed.

The second research method was in the form of semi-structured interviews aiming to expand on the results of the questionnaire. In order to provide more insight, the interviews were conducted with founders of growing startups as well as mentors for incubators and accelerators to ultimately explore the challenges that they face. The interviews also investigated the potential thoughts and plans to how, those involved in startups, thought they could build their businesses, to ensure profitability.

The study's findings puts forward a framework in order to understand how to balance growth and profit within startups. The findings suggest founders should analyse their business stage and understand the market in which they operate to realise whether a focus on either growth or profitability. The framework, produced as a result of this study, advocates that those involved in startups should look objectively at their situation in order to help guide an organization to success.