Critical Mass


According to Investopedia, critical mass is the point at which a growing company becomes self-sustaining and no longer needs additional investment to remain economically viable.  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 the world of finance, potentially high growth start-ups frequently seek multiple rounds of private financing, hopefully at rising valuations and increased size, with the goal of eventually becoming self-sustaining.

Investors might want to seek to assess when further infusions of capital might no longer be required to perpetuate additional growth.  For example, consider the number of new electric vehicle (EV) start-ups.  Launching a new car maker is incredibly expensive, the costs come years before the profits, and margins are typically relatively low.  All are a long way from achieving economies of scale and currently focus on very high end vehicles with limited markets.  It is likely that not many, if any, will survive.  On the other hand, Tesla has almost certainly reached critical mass, helped by large sales of regulatory credits and an unusual, short term, disparity between vehicle demand and supply, which has given manufacturers exceptional pricing power.  All the legacy car makers are focusing on a rich product mix in order to optimize limited chip availability.  

All comments and suggestions are welcome.

Walter J. Kirchberger, CFA

Subscribe to Sigma Investment Counselors Blog by Email.