The secret to keeping a high-growth business growing is largely about prioritization. Start-ups focus on invention and momentum by doing more of everything. As your business becomes growth oriented, you need an investment strategy that utilizes your capital and resources to sustain that growth. Here are three guidelines to keep in mind.
1. Create a Profitable Business Model
Duh, right? Every business aims to create a profitable business model. The source of value in the business is the long-term profit potential it possesses. But it's very easy for growing businesses to move away from this mindset. Growing businesses typically have a viable customer offering or two along with a number of attractive investment opportunities. Most of these opportunities require a redirection of would-be profits and resources that can easily drive the business into negative territory.
Profits create choices and allow you to invest in the best opportunities that come your way. Although CEOs of start-ups like to prove that their "hockey stick" forecasts justify losses in the near term, most of the growth-business CEOs we talk to say that profitability creates growth, rather than the other way around. Profits and growth occur more frequently than losses and growth.
2. Take a 3 to 5 Year View of the Business
The calendar-year P&L often is a distraction to growing businesses. Growth typically follows a multiyear growth path, and it doesn't always follow a smooth upward trajectory. Near-term metrics are important to track in order to give you feedback on your progress, but in most businesses the 3-5 year time horizon is necessary to play out the strategy. Build in the assumption that annual fluctuations will have both positive and negative effects on your business, but growth will smoothe out over a 3-5 year stretch. In other words, don't spend all your cash in a calendar year just because you have it. Time is typically helpful in answering critical investment questions.
3. Build an 80/20 Portfolio
We've found that the most successful growth businesses, whether they are $10 million companies or $1 billion corporations, focus 80% of their resources on the core business and 20% on new, adjacency opportunities. A general rule of thumb is that the core business is always the source of the best investment opportunities. Great teams always find better and more profitable ways to serve their core customers. Plus, investing in your most profitable customers usually leads to more profits rather than less. There's a reason those customers continue to buy from you; it's likely that you do something unique for them that they value.
But it's also important to invest in adjacent markets, customers, and products where you can leverage your core strengths. It is these adjacency investments that lead to future growth. Companies that do not invest in adjacent opportunities are destined to see their growth slow over time. Identifying adjacencies allows you to build your next growth horizon.
Creating an investment strategy is one of the foundational steps to building a sustainable growth business. Once you put these key principles in place, you will be well positioned to create a plan for sustaining growth over the long term.
What are the investment philosophies you have put in place in your growth business? Share your thoughts and questions with us at email@example.com.