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

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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A Brief History Lesson

For example, the dotcom boom went bust after a few exceptionally crazy growth years. Do you remember You do negatively if you were an investor. Dotcom entrepreneurs were driven by the conviction that internet businesses were different and that this was the new economy. It was not necessary to worry about profitability because when the firm grew, it’s value would grow and that was all that mattered. Market share replaced profit as the measure of success. If there was a cash flow problem, IPO was the obvious solution. The faster the burn rate of the firm the better. Profitability would one day just magically come.

However, reality ultimately caught up with this madness and the old fundamentals of economic theory proved still valid. We have a very uncomfortable feeling of dejà vu all over again. Is human memory really that short, or is there a mass delusion that once again economic fundamentals no longer apply? Are we about to witness a repetition of a rather recent past? For example, have you found yourself asking what the revenue model of Twitter looks like? We do not know, and most of our colleagues say there is no revenue model other than the catch all of “advertising revenues”! But do they really? There are no ads on Twitter and the ones on Facebook are annoying. Just how much can advertising budgets really support all the new ventures based on a share of advertising dollars. We know that the creator of Twitter, Jack Dorsey made a fortune selling the company, but that is a different story. That was his exit strategy by applying the theory of the greater fool. Want to try again? What is the revenue model of Instagram? The investors were looking for an exit and they found it! Somebody, in this case Facebook, bought eyeballs.

Not too long ago smart phone applications – apps – were projected as the next generation million-dollar business. Governments and universities rushed to create incubators for such apps, hoping to cash in on the “would be” bonanza. But, recent data show that most apps can generate an annual return, which at best is no more than US$100,000. Just how many dating apps can one have on a cell phone before someone finds love? Old theories on market saturation seem once again to be at play. Memories are indeed short! As a final attempt to explain that something new is again taking place we often then hear that there is a possibility to focus on target markets. However, please remember that if you are micro marketing you are also most likely to serve a micro market with micro returns.


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.

The Bitter Truth

We need to start asking what is being maximised: growth, profits, return on investment, or unbelievable high revenue multiple at an IPO. Above all we need to understand what we mean with growth in the entrepreneurial context. Employee growth and revenue growth are two very different dimensions of growth that do not correlate very well as we note in our book as well as in an article in 2011 (Kiviluoto et al, 2011).2 Recent observations also show this very clearly. Mobile games have recently had some success in Finland and the popular press been projected these as a future Eldorado for Finland. There are many globally successful game companies, which are making a profit and which are growing. The reality is these firms only employ 1200 persons in Finland, which is less than 1% of what the entire commerce sector employs.

While policy makers want employee growth; we have yet to meet any entrepreneur who tells us they created their venture because they wanted to hire lots of people. Usually the reason is something very different. Moreover, we have also found that most entrepreneurs do not want to grow beyond 10 persons, preferably keep it at no more than five. Pick almost any country and you will find that approximately 93 percent of that country’s firms employ no more than 10 persons. Large firms, employing more than 250 persons, usually account for less than one percent of all enterprises. We think these numbers reflect the reluctance to grow a venture among entrepreneurs. So, why are there no more than 10 employees? One potential explanation may be offered in Miller’s Law; the number of objects (here individuals) an average human can hold in working memory is 7 ± 2. That is, more than 10 employees increase the complexity. With that previously unnecessary structures become necessary and with these come bureaucracy and inflexibility usually associated with large organisations.

The reality is that most companies start small and remain small and, as already pointed out, wish to remain small. Only three percent ever manage to grow beyond 100 employees. Microsoft, Amazon, Genentech ADM, or GM all started small. These managed to grow and become huge multi-national organisations, but they are what we call outliers – they are the exceptions. Very few firms will go through an IPO and become public and certainly not start with an IPO.

We know of one exception – that did not end well – People Express Airlines. It started literally with an IPO which then allowed the firm buy planes from Lufthansa and hire employees. It went from three planes and less than 200 employees from day one to 60 planes and 3000 employees in under five years, after which it was sold to Continental, which is now United Airlines. This is a great example of the fastest growing airline in history becoming very quickly one of the fastest into bankruptcy (Carsrud and Ellison, 1990).3

Throughout our recent book we show that consistently high growth firms are mostly a myth if not as rare as a unicorn. This is certainly true for privately held start-up firms that have been the focus of our studies. For a firm to succeed in creating consistently high growth really requires that the firm first becomes profitable after which it can focus on growth. And even then, roughly one company in ten can sustain above average growth rates for more than just a few years. Moreover, as we show in our book, one in ten firms with exceptionally high growth can translate it into profitability, but that every second profitable start-up can become highly profitable. That is, growth, in almost all cases, does not lead to profitability. However, profitability can lead to high growth profitability (see also, Brännback et al, 2009).4

This is also shown in a simple observation we have made for a number of years. Annually Deloitte publishes a ranking of top 50 high growth firms, in Europe and in specific countries. Regardless of list we have noticed a phenomenon we have come to call “they are on the list, they are off the list.” That is, a firm that tops the list with exceptionally high growth rates usually cannot sustain it even for one more year. What is obvious is that sustained high growth is extremely rare. Firms may hit the pole position with exceptional growth percentages but they never stay there long.

The old truth remains: it takes money to make money. You either earn that money through profits or you borrow it, or you take on additional equity. This also indicates that the biggest threat to a firm’s existence is potentially its own growth rate, or as the late Neil Churchill of Harvard Business School and INSEAD would say “nothing will kill you deader than your own success.’


The Birth of the Growth Mantra

But, where does this growth mantra come from? From our studies it appears that it began after the publication of David Birch’s book “Job Creation in America” in 1987. In his book Birch showed that small entrepreneurial start-up firms were the fastest growing companies in the US.5 Contrary to previous common wisdom it was not large firms that were growing and thereby the main engines of economies. Growth was measured as employment based on data from 1969 and 1976. Of course, if a small firm with 2 employees adds on 2 more persons, the firm grows 100%, if a medium sized firm with 75 employees adds on 2 persons it is a relatively low growth percentage! Other studies showed that small firms were particularly effective in creating jobs during recessions (that is usually when large organisations conduct massive layoffs to secure shareholder value).

We need to start asking what is being maximised: growth, profits, return on investment, or unbelievable high revenue multiple at an IPO. Above all we need to understand what we mean with growth in the entrepreneurial context.

It is easy to see how this caught the eye of policy makers and politicians and most of them seeking re-election have rarely missed an opportunity to repeat the need for creating more new entrepreneurial firms. In December 2001 the same message was declared in the Lisbon treaty and 10-years later in EU2020. The Lisbon treaty specifically states that the key to a sustainable prosperity in the EU lies in the support of entrepreneurship thus creating economic growth. In the USA we see this sacred mantel of employment being used by venture capitalist and investment bankers claiming they are the “job creators.” The reality is they really don’t want firms to hire employees that costs money. What they want is a high return on their investment.

For example, as a part of our research we conducted in-depth interviews with entrepreneurs, investors and policy makers. We asked them a simple question: what is most important growth or profitability? The immediate reply was growth. We then continued to discuss this topic and by the end of the interview the response had changed. The most important thing for a start-up firm was profitability. We also discovered that investor has one agenda: to ensure return on investment through a good exit strategy. If that strategy ultimately leads to the failure of the firm it is not the investor’s problem. They really do not care. But, the entrepreneur ultimately does care if they see this as more than just a quick exit.


We really have to pay close attention to how we measure growth and who is evaluating the growth rate and with what kind of an agenda.

Success Does Not Require Innovation

With a recent EU policy (EU2020) the focus is now on innovation. Innovation is essentially seen as doing the same thing as entrepreneurship. In reality they are not the same! While some entrepreneurship may require innovation, most does not. If novelty is the key, we then need to pay attention to the degree of novelty. That is, is it new to the world; is it new to a market; is it new to a region/country; is it new to the entrepreneur? With this kind of distinction we understand that an innovation ranges from frame breaking to essentially nothing more than pure imitation.

Growth entrepreneurship is not only about developing and commercialising new technology. In many cases start-up firms with the highest growth rates are service companies. Creating a profitable and growing venture based on an innovation from either technology or service sectors will be both difficult and different. The business models and revenue models will differ for each. The time it takes to reach sustained profitability will be very different. Take as one illustrative example a biotechnology firm focusing on drug development, which is based on scientific discovery (new to the world), and it will take typically eighteen years before it is finally proven viable, safe, and on the market.. Compare this with someone starting a Bed & Breakfast, which becomes number 1 on Trip-Advisor in two months (imitation). These two are certainly examples of entrepreneurship, but very different types. That is, the entire entrepreneurial process for a biotech firm is different from that of a hospitality business. Each will require different support mechanisms from policy makers, bankers, investors, and various other stakeholders.

How does one measure growth appropriately in the above two examples? The biotech company will not have any revenues let alone profits for years to come. The Bed & Breakfast will have revenues from first day of operations, whether it at the same time also generates profits depends on costs of operations and possible bank loans. Regardless, both are likely to occur within 18 months, not 18 years as in the case of the biotech firm.

A much more interesting question might be to consider whether growth is meaningful, or even desirable for the B & B. If we think in terms of employment, we suspect that that magic 10 will once again appear and that a much more viable approach for the B & B is to keep employment low and buy needed services from other providers, often other small firms. Thus, there is a multiplier effect with respect to employment that we often find ignored when looking at sectors that lack the “sex” appeal of biotechnology.



Hopefully we have challenged you in this article to think of growth as complex phenomena. We also hope you now understand why profitable growth is a real challenge to any entrepreneur. When we look at growth firms we really have to pay close attention to how we measure growth and who is evaluating the growth rate and with what kind of an agenda. The assumptions and conclusions that are made will be highly dependent on understanding this complexity. Growth is not necessarily always good. Growth does not automatically mean profitability. Employment growth usually means increases in costs that easily can exceed revenue growth thereby rendering the venture unprofitable. But employees are not the only cost factor and having no viable revenue model is usually far worse than too many employees.

While others are starting to see what we have seen, our research is unique because we have explicitly studied private start-up firms. Most available data and research concerns publicly listed companies, as that data is more easily available. But, that does not mean that data is unavailable – it just takes a little more effort to find it. Publicly listed companies are a different breed, but only because to get there usually means they have survived and have met listing standards.

We also know that family owned and managed firms are different. Their focus is first and foremost on ensuring the sustainability of the firm (and the family) beyond the current generation. Therefore they are likely to have lower levels of growth aspirations if the company is at risk. Sustained profitability and firm survival are absolutely critical. This may explain why some firms are over 1000 years old and owned by the same family. Even Warren Buffet has found that his best acquisitions at Berkshire Hathaway are family firms.

As Warren Buffet has also found, successful profitable growth firms come from a variety of industries, be it knowledge intensive or labor intensive; manufacturing or service industries; dynamic new sectors as well as mature industries. The critical point is that many viable business ideas are overlooked by investors and policy makers, because they do not fit the assumed mold of technology entrepreneurship. Finally, we hope this paper has made you willing to challenge your own assumptions about what makes a successful venture.


About the Authors

Malin Brännback, D.Sc. (Econ. & Bus. Adm.), B. Sc. (Pharm), is Vice-Rector and Chaired professor of International Business at Åbo Akademi University, Finland. She is also visiting Professor in Entrepreneurship at Stockholm University School of Business, Sweden. She is a corporate Board Member of several Finnish firms, both start-up companies and more established. For ten years she was a Board Member of Nordic Academy of Management and served as its chairperson 2009-2011. She has published widely on entrepreneurship, biotechnology business, and knowledge management. She has co-authored with Alan Carsrud eight books, including Understanding the Myth of High Growth Firms, The Theory of the Greater Fool (2014).

Alan L. Carsrud, Ph.D., Ec.D. (h.c.) is Visiting Research Professor and Docent at Åbo Akademi University (Finland) and Managing Director of Carsrud and Associates, USA. He was the Loretta Rogers Chaired Professors in Entrepreneurship in the Ted Rogers School of Management at Ryerson University in Toronto, Canada. He was on the start up team at People Express Airlines. He has helped launch, or grow, over 200 technology firms world-wide. His consulting clients have included IBM, the Government of the United States of America, Ernst and Young, the State of Texas, The Finnish National Technology Agency (TEKES), The Republic of Palau, Queensland (AUS) Chamber of Commerce and Industry, and Texas International Airlines (now United). He has co-authored eight books with Dr. Malin Brännback, and has published over 220 peer reviewed articles and book chapters.



1. Brännback, M., Carsrud, A., & Kiviluoto, N. (2014). Understanding the Myth of High Growth Firms: The theory of the greater fool. Springer: New York.

2. Kiviluoto, N., Brännback, M., & Carsrud, A. (2011). Are firm growth and performance the same or different concepts in empirical entrepreneurship studies?: An analysis of the dependent and independent variables. In Raposo, M., Smallbone, D. Balaton, K. & Hortovanyi, L. (eds.) Entrepereneurship, Growth and Economic Development. Frontiers in European Entrepreneurship Research, Edward Elgard, Cheltenham UK. 11-29.

3. Carsrud, A. L. & Ellison, B. B., (1990) A Change in the Air: Deregulation of the European Airlines. European Business Journal, 2(2), 8-17.

4. Brännback, M., Carsrud, A., Renko, M., Östermark, R., Aaltonen, J., Kiviluoto, N. Growth and profitability in small and privately held biotech firms: Preliminary findings, New Biotechnology, 25(5): 369-376

5. Birch, D. (1987) Job creation in America: How our smallest companies put the most people to work. New York: Free Press.




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