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In the ever-evolving world of startups, one debate stands out as both timeless and urgent: the trade-off between growth and profitability. While rapid expansion is often lauded as a marker of success, the long-term sustainability of a business invariably hinges on its ability to turn profitable. Striking the right balance between these priorities has never been more critical, especially in today’s dynamic economic landscape.
This debate is far from binary. The real question isn’t whether startups should prioritise growth or profitability, but how they can balance the two effectively. The answer depends on the startup’s unique stage, market conditions, and the nature of the innovation it aims to bring to life. Lucky for us, our founder and managing partner, Pearl Agarwal, answered this question- featured here.
In 2021, India’s startup ecosystem witnessed unprecedented growth, with more than $42 billion in funding and 45 unicorns emerging. This era was marked by a growth-at-all-costs mentality, buoyed by abundant capital and low interest rates. Startups were encouraged to pursue aggressive expansion strategies, often postponing profitability in the belief that it would follow naturally.
However, global economic conditions have since shifted. Rising inflation and increasing capital costs have recalibrated investor expectations. Today, investors are less willing to wait indefinitely for returns, prompting startups to articulate clear paths to profitability- sometimes on timelines that challenge the very essence of their business models.
The result has been a dramatic shift in focus for many startups, especially younger ones that were built in an environment of seemingly endless funding. Balancing growth and profitability has become a tightrope act, requiring founders to rethink their strategies and adapt to a new normal.
It’s important to remember that the core objective of venture funding has always been to support innovation. Venture-funded startups differ fundamentally from lifestyle businesses. They are designed to explore uncharted territories, introduce products never before seen in the market, and create entirely new ecosystems. Expecting profitability from the outset in such cases is not only unrealistic but also counterproductive.
Take the example of Zomato. For over a decade, the company operated at a loss to establish itself as the dominant player in the food delivery market. By creating strong consumer habits and capturing significant market share, Zomato eventually paved the way for profitability.
On the other hand, startups in established markets or those offering incremental innovations often need to adopt a different strategy. For example, SaaS companies operating in niche or well-defined verticals frequently achieve profitability earlier, thanks to their predictable revenue streams and lower customer acquisition costs compared to sectors like e-commerce.
Related: Key Metrics That Pre-Seed Investors Seek
Early-stage losses are not inherently bad—when they’re strategic. Startups should focus their spending on customer acquisition, market penetration, and brand building, rather than subsidising the fundamental costs of their product or service. High operating leverage is key: while fixed costs may be significant initially, the ability to scale profitably as volumes increase should be built into the business model.
However, this approach requires a clear roadmap. Founders must have a timeline for transitioning from growth-focused investment to profitability—typically within three to four years. Beyond that point, generating profits not only ensures sustainability but also enhances shareholder value through dividends and increased share prices.
At Eximius Ventures, we believe this balance must be dynamic. Early on, startups need to double down on aggressive growth strategies, establishing strong customer loyalty and refining their value propositions. As the business matures, the focus should shift to achieving profitability, leveraging operational efficiencies and scaling sustainably.
The rapid evolution of global markets further complicates the growth vs. profitability debate. Startups today must adapt to shifting macroeconomic trends, including changes in consumer behaviour, technological advancements, and investor expectations. This requires not just flexibility but also a deep understanding of the levers that drive both growth and profitability.
One way founders can navigate this complexity is by building resilience into their business models. This means maintaining a diversified customer base, investing in technology that enables scalability, and ensuring operational efficiency from the outset. Founders should also prioritise data-driven decision-making, using real-time insights to inform their strategies and pivot when necessary.
Global startup ecosystems, such as Silicon Valley and Southeast Asia, offer valuable lessons on managing the growth-profitability balance. In Silicon Valley, for example, startups often embrace the “blitzscaling” approach, prioritizing rapid growth even at significant losses. Companies like Uber and Amazon initially operated at substantial losses but focused on market dominance, eventually achieving profitability through economies of scale. Southeast Asia, on the other hand, has seen success with startups adopting more measured growth strategies due to smaller market sizes and tighter funding conditions.
These global case studies underline the importance of tailoring growth and profitability strategies to the local context. For Indian startups, understanding and adapting these lessons to a unique, high-growth but cost-sensitive market can help them strike a balance more effectively.
Investors play a crucial role in determining whether startups prioritize growth or profitability. During funding booms, as seen in India in 2021, the emphasis is often on scaling quickly to capture market share. This can lead to “growth-at-all-costs” mindsets, pushing startups to expand aggressively even when operational models are not fully sustainable. Conversely, in funding downturns, investors shift their focus to sustainability and profitability, expecting startups to cut burn rates and demonstrate financial discipline. This duality places immense pressure on founders to navigate changing expectations.
Progressive investors, however, recognize that startups are not one-size-fits-all and adjust their approach based on the company’s stage and sector. By offering flexible funding structures and supporting long-term strategies, these investors enable startups to grow sustainably while maintaining profitability goals. At Eximius Ventures, we actively engage with founders to build a tailored growth roadmap that considers market realities and long-term business health.
Startups that mismanage the growth-profitability balance often face dire consequences, ranging from investor distrust to outright business failure. Growth without a roadmap to profitability can lead to cash flow crises, where high burn rates outpace funding availability. On the other hand, focusing too heavily on profitability too early can stifle innovation and market expansion, causing startups to lose out to more aggressive competitors.
Examples abound of startups that grew too quickly without sustainable models, only to face dramatic collapses when funding dried up. Conversely, startups that stayed too cautious often failed to make a mark in competitive markets. The key takeaway is that a thoughtful, strategic approach to balancing growth and profitability is not just a best practice but a necessity for survival.
India’s startup ecosystem is at a turning point. With one of the fastest-growing innovation hubs in the world, the country has an opportunity to redefine how startups approach growth and profitability. By embracing a balanced approach, Indian startups can not only weather short-term challenges but also build businesses that stand the test of time.
The most successful startups are those that understand the importance of this balance. They focus on rapid growth during the early stages to capture market share and create lasting consumer habits. Yet, they never lose sight of the ultimate goal: long-term sustainability and value creation.
For founders, this means staying grounded in their vision while being pragmatic about execution. For investors, it means supporting startups with the patience and resources they need to navigate this delicate balance. At Eximius Ventures, we are committed to empowering founders to do both- grow boldly and build sustainably.
The growth vs. profitability debate will continue to evolve, shaped by economic shifts, technological advancements, and market trends. But the startups that succeed will be those that master this balance, delivering value not just to their customers and investors, but to the broader ecosystem as well.
In the end, longevity is not about choosing between growth and profitability; it’s about knowing when to prioritise each and how to bring them into harmony.
Eximius Capital Ventures Private Limited is the investment manager of the funds licensed by SEBI under AIF categories CAT I – Eximius Trust I (IN/AIF1/20-21/0855) and CAT II – Eximius Fund (IN/AIF2/24-25/1566).
Eximius Capital Ventures Private Limited is the investment manager of the funds licensed by SEBI under AIF categories CAT I – Eximius Trust I (IN/AIF1/20-21/0855) and CAT II – Eximius Fund (IN/AIF2/24-25/1566).
