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Are High Growth Firms Really About Profit, or Just Greed?

July 17, 2014 • Finance & Economics, Strategic Spotlight, STRATEGY & MANAGEMENT

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By Malin Brännback and Alan Carsrud

Successful and profitable growth firms come from a variety of industries, but many viable business ideas are overlooked by investors and policy makers, because they do not fit the assumed mold of technology entrepreneurship. Below, Malin Brännback and Alan Carsrud argue that it has been decades since the creation of profitable and sustainable ventures was the real goal of anyone involved in creating high growth firms, and challenge the assumptions about what makes a successful venture.

Reality Check.

Recently we argued in “Understanding the Myth of High Growth Firms, The Theory of the Greater Fool” (Brännback, Carsrud, Kiviluoto, 2014)1 that it has been decades since the creation of profitable and sustainable ventures was the real goal of anyone involved in creating high growth firms. We base this on our own, and others’, extensive research and observations. Growth alone has been the real focus of investors, bankers, entrepreneurs, popular media, elected officials, governmental policy makers, and even universities. It has been assumed that growth alone creates shareholder value.

What everybody has forgotten is that growth creates shareholder value through profitable growth. What people fantasise about is the sensational firm with growth rates in triple digits, sexy new technology, and/or a “rags to riches” story that captures media attention. Few, if any, have been concerned with whether the venture really can make money and even less how it makes money. They each have their own agenda. Most public policy makers think these firms mean high employment that will get them re-elected, while early investors and entrepreneurs are anxiously trying to create a viable exit strategy where they can cash out while the hype is high.

However, at some point the ‘theory of the greater fool’ eventually becomes obvious. If the larger society is not able to refocus venture-creating activities on building profitable firms we will be reduced to fundamentally inventing new and more sophisticated ways to nurture human greed. That is, sustainable economic growth is substituted with get rich quick schemes much like Bernie Madoff perpetrated with investors looking for high returns. Economic history is littered with booms that went bust, be it tulip mania in Holland in the 1600’s or the dot com bubble in 2000 or the real estate bust in the US that lead to the Great Recession.



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