It’s a question as old as business itself: Should you put profits into your
pocket or back into your production?
Choosing between keeping profits and spending them on company growth has always been
tricky, but the hyper-growth made possible by the Internet presents even more considerations.
Fast growth takes a lot of money, usually all of your profits and then some. And while some
investors are eager to fund high-growth companies, others prefer businesses that hold profits
tight.
It wasn’t so long ago that Amazon.com founder, Jeff Bezos, bragged that his company didn’t
need to be profitable. Why? Because he knew that the growth possibilities in online commerce
were nearly limitless. He didn’t want to amass profits; he wanted to build a giant company and
grab market share. In fact, Amazon spent five unprofitable years (1994–1999) building more
than $1 billion in sales before posting its first quarterly profit.
Bezos was right. He made a smart decision to go for growth, and the venture capitalists lined up
to invest. That’s what VCs do. They invest in growth, hoping that a bigger, faster-growing
company will ultimately be more valuable. They invest for the long term, relatively speaking.
Other companies, take Apple for example, choose to grow more carefully and pocket the profits.
Like Microsoft and other tech giants, Apple has amassed an astounding amount of cash as a
result. Because stock market analysts reward profits and cash, this strategy is common among
large public companies.
Profitability is also nice for the small family-owned company. Not every business has to end up
on the NASDAQ; plenty of fortunes are made by running a lean business day to day and
squirreling away the profits year after year.
To decide between profit and growth, a private business should look to the shareholders and
their long-term goals. If there is just one shareholder (you), the decision is pretty simple: Are you
in business to support your family and lifestyle, or are you aggressively building a business to
change the world?
A lifestyle business has to throw off profits to the owner. Business growth is naturally limited by
the amount of profit the owner needs to pay his own bills. Eventually every lifestyle business
defaults to prioritizing profits.
A bigger, “world-changing” business strategy puts substantial financial pressure on the
stockholders. They must have the stomach for a long-term investment and be willing to live
without profits (dividends) for several years. They might also have to give up some of their
ownership to invite in new investors, in effect, trading a piece of the pie now for a much bigger
pie in the future.
Deciding whether to go for growth or pocket the profits should also be weighed against the kind
of funding available to the business. Bezos at Amazon chose growth knowing that VCs could be
counted on to prop up the unprofitable company. If your business is not a good venture capital or
angel investment candidate, this could be a dangerous path.
Profitable companies attract a very different kind of capital. Private equity funds, commercial
lenders, factoring agents, even neighborhood banks all love to put money into highly profitable
enterprises. Paradoxically, some of these same bankers will even finance growth once the profit
model is proven and reliable. But in all cases, profits have to be pretty strong and steady.
Either strategy can provide a great way to build both personal wealth and a healthy business, as
long as you are clear about it and dedicated to the path forward. The real danger comes from
wavering and trying to do both.
A high-growth company that slams on the breaks to harvest profits becomes a disappointment
for the venture investors. Likewise, a profitable company that suddenly plunges into a loss
situation to finance growth appears too risky for bankers. Moving from one mode to the other is a
sure way to stumble.
Selecting the right path for your company can be an emotional decision as much as a financial
one. But not deciding is not really a choice. Set the course and stick with it.
