The Get-Big-Quick Fallacy !

Is it better for a start-up to purse profitability initially, or go for growth? Advocates of that second, get-big-fast approach inevitably point to companies like Tumblr (the company founded by a high school dropout that Yahoo! just acquired for $1.1 billion before it had even $20 million in revenues) or YouTube (which was sold 19 months after its founding to Google for close to $2 billion), or other companies whose hyper-growth attracted suitors before a viable business model emerged.But it's important to consider how incredibly rare these examples are. For every Tumblr there are dozens of companies that had some success but never broke through — and hundreds more that never really got out of the starting block. Research by Harvard Business School senior lecturer Shikhar Ghosh, in fact, has found that fully 75% of venture capital-backed startups — presumably the crème de la crème of the startup world — failed to return the capital invested in them to their investors (let alone generate positive returns).A pure focus on growth carries risks. If you are a growth-obsessed startup and venture capital financing dries up and buyers grow scarce, you can run out of money. If you are inside a big company, profit-draining ventures are typically early sacrifices in corporate cost-cutting exercises.Why then do so many people doggedly focus on growth? There's a term in the psychology literature for this — the availability heuristic. Big events are endlessly discussed and analyzed. They lodge in our memory, fooling us into thinking that they happen more frequently than they actually do. An oft-cited example of this phenomenon is the difference in perceived risks between getting on an airplane and getting in an automobile. Airplane crashes tend to be major news events; automobile accidents aren't. The worst year for airplane fatalities was 1972, when more than 3,000 people died in plane crashes. That's roughly the number of fatalities in automobile accidents in a typical month in the United States. Growth is great, but profits are more convincing proof of long-term viability. Sufficient profits make a business self-sustaining, inoculating ventures against the need to pry money from tight-fisted venture capitalists or often-skeptical corporate investors.