What is 'Critical Mass'
Critical mass is the point at which a growing company becomes self-sustaining, and no longer needs additional investment to remain economically viable.
BREAKING DOWN 'Critical Mass'
Critical mass is a very important stage in the development of a growing company. It is the point at which the company no longer requires outside investment – of money, resources, or human capital – to continue being viable. When a company reaches critical mass, it is profitable enough on its own terms to continue growing by itself. However, once a company has reached critical mass, it is not always clear whether continuing to grow or attempting to scale back is the wisest course of action.
Whenever a company grows, it requires investment. When a new business first opens, it must first have invested in the means to perform its intended function before it can begin to generate its own revenue. In this respect, it is essential that any company grows to a point at which it can repay the initial investments as well as generate enough money to at least keep the company functioning at its current scale without further investment. At this stage, a company has reached critical mass. The idea of critical mass should not confused with economies of scale, which is a point at which a company can continue to grow with vastly decreased investment in the expansion.
The Origin of Critical Mass
The term is derived from nuclear physics, where critical mass is defined as the smallest mass that can sustain a nuclear reaction at a constant level. When compared to the term's financial use, the similarities are clear – being self-sustaining is the goal. The reaction metaphor also evokes the drive for growth that is found within a company. A company can be self-sustaining at operating capacities higher than their critical mass, but a company's operating officers should take care to ensure that any additional growth is achieved at a sustainable level.
Adding clients and revenue to a company is always deeply enticing, but increasing the volume of business requires additional investment in the equipment, personnel hiring/training, licenses, etc. to fulfill the company's commitments to their customers. Increased business does not automatically equate to higher profits, and many companies have collapsed by expanding too quickly beyond their means and become mired in irreversible negative cash flows.
As such, critical mass is a crucial stage in a company's development. Once a company is self-sustaining, it has to make decisions about whether to continue growing. Many companies take their new sustainability as an opportunity to expand, but in a new industry that is rapidly growing (which are the sorts of industries in which most very new companies are operating), it can be very difficult to control growth. However, excessively cautious growth can also result in a company being pushed out of the industry if a rival is able to claim most of the market.