Measure Twice, Cut Once: Unit Profitability, Scalability, and the Exceptional Growth of New Firms

By studying three promising venture pairs with different business models in different nascent markets, we explore how some new firms grow into mature firms and some promising peers do not. The successful firms first use a learning process that begins with (1) focused attention on unit profitability (not growth), then broad (not narrow) learning, and finally active delay (not acceleration) of growth. They then use a capability-building process that (2) shifts to focused attention on unit-profitable growth, then makes long-term investments in profit-oriented capabilities, and finally leverages these capabilities into new products. In contrast, peers with focused attention on growth ironically fail to achieve it. Broadly, we contribute a process theory of exceptional growth that fills the gap between the growth of new firms in the entrepreneurship literature and the growth of mature firms in the strategy and organization theory literatures. Further, we add the importance of learning content—not just learning processes—to the entrepreneurship literature on new firm growth and a rare, novel, and grounded account of the origin of capabilities to the strategy literature on the resource-based view and mature firm growth. Finally, we add to practice the significance of product–market–profit fit and a precise definition of premature scaling. Funding: This work was supported by the Strategy Research Foundation [Grant SRF-2018-DP-9167].