In the startup world, we like growth and always spend time planning how to make it happen. Job titles like VP, Growth; Manager, User Growth; and Team Lead, High Growth are now common. There is nothing wrong with that: growth is the heart of any business. In web business, because of the elements of network effects and the benefits of invertibility construct, the thinking is that growth drives the business. Yes, growth is important; but without an important margin in business, over time, the business will die. The profit margin is the most important element in any business formation and operation. It is the fuel that gets a business going. It is the enabler, catalyst and the anchor of the corporate long-term vision.
Largely, we are in business for profit margin. It may not be obvious because there are many companies which operate for years without profitability, by raising tons of money, in successions. But even with that, over time, the companies will be expected to make money. Even if the companies are sold, the buyer must still have to find profitability in the operations for the following reasons:
- Running and Growing Companies: It is only by making profit that a business can be sustained over time. Without profit, the mission is stalled. The vision of accelerating prosperity and the welfare of people can only happen when a firm makes money
- Corporate Social Responsibility: Doing good as a business does not happen with free water or air. Money funds great ideas to help communities and societies. To do that, a firm must make profit
- Investors Part: When investors put money in your company, they are really investing in your profitability. It is irrelevant if you are making money today or not. The fact is that they do believe that you will make money in future. It is from that profit that you would pay dividend. If the firm is publicly traded, profitability provides a good metric to the health of business. Generally, it does impact the growth of the stock.
So, as you work on the mission to change the world, it is important to understand that you must make money doing so. Making money, ethically, is the core business you are in, because without making money, you may be unable to help society. The passion for profit has pushed even typical non-profits to explore ways to make money so that they can serve communities better.
The Kenya Red Cross is a very good example: the charity runs a hotel business in Kenya and invests in education, farming and more. At the end, it generates good profit margin that it does not need any donation to support its mission. With ventures generating profits, executing the mission of Kenya Red Cross has been simplified. I spent a day with the CEO early this year and was thrilled on how they have fused business with helping communities, at scale. They have more functioning ambulances than the Government of Kenya, and they run a top-rate school on hotel management with students coming from far away China, Nigeria and India.
If a charity can see that profit margin is vital, it means that for-profit startups have no hiding place. Indeed, “No Margin, No Mission”, as Fortune aptly captured it, recently. You must find ways to have good margin because that is the first mission in business. Other missions emanate from it.