Entrepreneurs and growing companies must be willing to bet last year’s profits to increase the odds for future growth.
Our leadership team recently met to formalize our goals, financial targets and action plan for 2012. After aligning on our strategy, we saw a clear theme emerging: to achieve our goals for the year, we need to double down.
Placing bets is part of any entrepreneurial, growth-oriented mindset. All the entrepreneurial superstars over time, from Henry Ford to Bill Gates to Larry Page and Sergey Brin, created rapid growth for their companies by making strategic bets and investing heavily. These pioneers didn’t just make one good bet–they hit the jackpot year after year after year. In other words, they doubled down to create growth by reinvesting the profits of the company into cementing their competitive position and developing new growth avenues.
Our management team has a good track record of making the right bets, which has led to a greater than 1,000 percent average annual growth over the past three years and enabled us to make the Inc. 500. Each year, we bet our “winnings” on creating future success. This year is no different: We need to reinvest last year’s profits to build a stronger foundation to enable sustained growth for years to come.
When executing a "double-down" investment strategy, there are three things to keep in mind:
You are prioritizing long-term goals over short-term goals. What you achieve this quarter or this year is mostly irrelevant to your longer-term goals. For instance, a growing business we’ve worked brought in $1 million of revenue last year, but is aiming to be a $100 million business in three years. Whether it achieves $10 million or $12 million next year should not be a major focus–as long as it positions itself to reach $100 million in three years.
You will be more focused on building a foundation for future success than executing a winning game plan. Your actions will focus more on creating drivers of future value. Going into the last week of the NFL’s 2011 regular season, the Indianapolis Colts and the St. Louis Rams both had a chance to end the season with the worst record, which would secure the first pick in the 2012 NFL draft. If the Colts’ goal was to win the Super Bowl in 2013, the team helped its cause by losing its last game, because it gave them the top position in the draft. The Colts lost their last game but increased their chances to be successful two to three years down the road.
Until you temper your growth ambitions, you will re-invest your profits toward growing the business. Growing companies are making a strategic choice to grow rather than to take profits in the short-term. Most growing businesses have the opportunity to cut investments and costs, and therefore increase short-term profits (or decrease losses), but they choose to reinvest these would-be profits to fuel their growth. Until the growth opportunities in your business dissipate, or you choose not to pursue them, you will continue to forgo near-term cash flow and re-invest for the future.
By doubling down in 2012, we hope to build a foundation for future years. This may mean making less money this year than we otherwise would, but we’re confident our investments will pay off down the road.
KARL STARK AND BILL STEWART are managing directors and co-founders of Avondale, a strategic advisory firm focused on growing companies. Avondale, based in Chicago, is a high-growth company itself and is a two-time Inc. 500 honoree. @karlstark