Balancing growth and profitability

Early on, scaleups face significant pressure to grow at all costs. This approach may boost market penetration, but often at the expense of scalability and profitability. To balance growth and profitability, scaleups can use a three-step framework: 

1. Assess financial metrics against industry benchmarks; evaluate your performance against the Rule of 40 (revenue growth percentage plus profit margin percentage should equal or exceed 40%), track your liquidity runway, and optimize the ration between customer acquisition cost (CAC) and customer lifetime value (LTV).
2. Evaluate market conditions, including customer demand, competitive positioning, and broader consumer behavior and trends.
3. Gauge operational readiness to determine the ability to scale efficiently. This may involve streamlining operations, making data-informed decisions, establishing strong management, and securing robust investor support for growth capital. 

Common growth mistakes

Dhanak and Themistokleous frequently see growth companies make the same missteps as they expand:

• Over-hiring or scaling costs too soon: Focusing on growth and market share can come at the expense of developing a sustainable business model, leading to cash flow problems. For example, a scaleup may expand operations rapidly. But if that demand doesn’t materialize, expansion could lead to high operational costs without sufficient sales to cover them.
• Expanding prematurely without product-market fit: “We often see companies expanding too quickly—both organically into new markets and new product launches—without stabilizing existing operations,” Dhanak said. Success in one country doesn’t always translate to success in others. Businesses should account for cultural differences, consumer preferences and shopping habits before launching their products in new countries or regions. 
• Neglecting unit economics and macroeconomic concerns: “Companies often demonstrate a lack of focus on unit economics, prioritizing revenue growth without ensuring profitability,” Themistokleous said. “Such companies also tend to burn significant amounts of cash on customer acquisition,” Dhanak said. As they scale, companies should consider geopolitical conflicts and their impact on energy prices and supply chains. Companies should also factor in the impacts of interest rate fluctuations and regulatory changes, as well as tariffs, trade restrictions and talent shortages.
• Insufficient capital planning and follow-on funding strategies: Poor capital planning may include underestimating costs, ignoring contingencies and projecting overly optimistic revenue growth. Insufficient follow-on funding strategies often involve relying on a single source of funding. If that source dries up or becomes less favorable, the scaleup may struggle to find alternative funding.

How to know if you’ve scaled too quickly

There are several indicators of overgrowth, including:

• Negative unit economics, where revenue growth isn’t covering costs
• Declining customer retention due to poor product-market fit
• Burn rate exceeding 12-18 months of runway, without a clear ROI
• Operational inefficiencies, such as not meeting demand, reduced quality of service and not capturing market share in countries with existing operations
• Supply chain issues, including inventory mismanagement, inability to pay on time and suppliers unable to meet their goals

How to scale back from overgrowth

Companies can scale back by:

• Cutting non-essential costs: These can vary by organization. For example, a direct-to-consumer company could shift from paid advertising to organic growth strategies. A business-to-consumer company may focus on renegotiating its lease or reducing the number of brick-and-mortar stores. 
• Focusing on core profitable segments and dropping underperforming markets: “A SaaS provider might focus on higher-margin customers in the U.S. compared with markets like India, where the revenue per customer is low,” Dhanak said. Likewise, a fintech may postpone its U.S. expansion to focus and maximize market share in its home country.
• Reassessing headcount: This may include reducing non-critical hiring, using technology to increase efficiencies and shifting toward project-based or contract hiring for specific projects or tasks. 

You’ll sense your business is on the right track by looking at several metrics. “Customer acquisition cost will stabilize or decline as the business scales,” Dhanak said. “Your operational efficiency will improve without revenue declining, you’ll see positive unit economics and clear path to operational profits, and you’ll have at least 15 to 18 months of runway.”

How long it takes to see results from scaling back

The timeline for your company to stabilize depends on many factors. 

“Business-to-business scaleups have shorter turnaround compared to direct-to-consumer businesses,” Dhanak said. “We have witnessed timelines of 24 to 36 months for the results of scaling back to turn the former into black, while the latter have a much longer turnaround time. They can take more than 36 to 60 months, depending on the scale and product market fit.”

The methods you use to scale back also influence how long it takes to see results, Themistokleous said.

• With cost-cutting measures, such as headcount reductions and broader spending cuts, you can start to reflect on profit and loss within one or two quarters. “You’ll see a more visible impact on the bottom line by Q3 post implementation,” he said.
• “For strategic scale backs, such as exiting markets or segments, it might take slightly longer—more like six months—to reflect on the operating metric and unit economics,” he said.
• Structural changes, including automating processes such as onboarding and fraud prevention, could take a year to show material improvement.

Other factors include regulation concerns. “If a fintech scales too quickly and the regulator imposes a soft stop or asks the company for operational improvements, founders should be mindful of a reputational issue,” Themistokleous said. “This might add a layer of difficulty, and more time will be required to address the details of scaling back.”