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. It is a crucial stage in the development of a growing company. It is the point at which the business becomes profitable enough to continue growing by itself and no longer requires investment from outsiders.
A company that sustains profitability is able to exist safely and reliably above its 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.
- A company usually achieves critical mass when it has paid back initial investors and at the same time can continue running the business profitably without any additional investment required.
- The term critical mass is borrowed from nuclear physics, where it refers to the smallest mass that can sustain a nuclear reaction at a constant level.
Understanding Critical Mass
When companies reach critical mass, their leaders may face a decision whether to seek continued rapid growth or to focus on consolidating the firm’s market position and improving operations.
The initial growth of a company requires investment. When a business first opens, it must first have invested in building the capacity necessary to deliver the goods or services it intends to sell to customers before it begins to generate revenue. The company must grow to the point that it can repay its initial investors for the capital they have provided as well as bring in enough money to function without additional investment.
A company's critical mass is important because it marks the difference between thriving and surviving in a market environment.
When these conditions have been met, the company has reached critical mass. The concept of critical mass should not be confused with the concept of economies of scale, which refers to the point at which a company can continue to grow even while decreasing investment in growth.
This typically means that a company can produce its goods or services at a lower cost than before by making more goods and services without a significant increase in cost; this lowers the total cost to make each unit.
The term critical mass is borrowed from nuclear physics, where it refers to the smallest mass that can sustain a nuclear reaction at a constant level. In both physics and finance, it refers to a point at which a self-sustaining state is reached.
The reaction metaphor also evokes a company’s drive for growth. While a company can be self-sustaining at operating capacities higher than its critical mass, the firm’s managers should ensure that additional growth is sustainable.
Many young companies view achieving sustainability as an opportunity to expand, but it can be difficult to manage growth in fast-growing new industries in which many new companies operate.
Adding clients and revenue is always desirable for a company but it requires additional investment to fulfill the company's commitments to its customers. Increased business does not automatically generate higher profits. Many companies have collapsed after expanding too quickly and spending more than the new business brought in.
It's also important to note that even though businesses reach critical mass, this does not mean that they will not use financing in the future. The capital received from financing can be used for a variety of purposes, and financing, either equity financing or debt financing, allows a company to manage its assets, such as cash, wisely, which is often a smart strategic move.
Example of Critical Mass
To better understand the point in time when a company achieves critical mass, consider the fictional Company XYZ, which has been experiencing steady growth and increasing strength in the market. Steady revenues have allowed Company XYZ to invest in more capital and bring on additional hands.
The company's productivity subsequently increased, and eventually, its revenues exceeded its expenses. As such, it was also able to pay back its initial investors and now has enough profits to continue operating its business based solely on the core operations of the business.
At that point, XYZ became profitable, and the company is said to have reached its critical mass because its capital and human resources have reached a size at which they can sustain themselves.