The Scaling and Profitability Trade-off: A Venture Capital Perspective

Every business is faced with the question of whether to become bigger or build a better business model (delivering more in profits) and in this session, I start by looking at the factors that make that choice different for different businesses. I look at the conditions that make scaling up easier at some business than others, and the ingredients that go into a better business model. I also model out how founder characteristics (control versus ambition, longevity versus growth) and investor preference play into the scale vs profitability choice. In particular, I look at venture capital, the first stop for many ambitious business, and how the VC game (more pricing than value, top-heavy in terms of returns, lots of failures) can tilt businesses to prioritizing scaling over business models. I also look at two developments - a gray market, where private businesses can access increasing amounts of public equity, before they go public, and a public equity market, where momentum has stayed strong but reversals have weakened, and how those developments are also putting scaling ahead of business-building.