Growth vs. Profit in Startup Firms

Ron Berman, Marketing, The Wharton School; J. Daniel Kim, Management, The Wharton School; and Olivier Rubel, UC Davis

Abstract: Profit maximization is a central premise that guides much of our understanding of firm behavior. However, entrepreneurial companies do not appear to simply maximize profits. Instead, as highlighted by the phenomenon of “blitzscaling”, startup companies often prioritize growth over profit. While promising in some ways, the pursuit of immediate torrid growth can potentially hurt the firm’s long-term performance. Not much research has been devoted to analyzing this tension between growth and profit strategies. Our research project (i) explores the conditions under which the pursuit of growth is perilous and when it is not, (ii), identifies the strategies that ensure sustainable growth and finally (iii) characterizes when firms should shift their strategy from an initial growth strategy to emphasizing profitability.