Beware the up and to the right arrow chart
Investors love ‘capital efficiency.’ I learned that the up and to the right arrow chart can be the driver of inefficient and ineffective use of capital. But it doesn’t have to be that way…
I have been lucky enough to have two chapters to my career so far. The first was built within the Marketing Services Holding Company space where I worked in the media agency business. I ultimately ran the global digital business for one of the agencies within Publicis Groupe. While there, I was tapped to do both M&A and growth stage investing, which allowed the business to acquire and partner with the new technology and talent to enable future success in the ever-changing marketing landscape. It was through that experience that my second chapter started.
I found that I loved building through acquisition and the impact of working with and operating earlier stage companies. I have since run several of them, learned a ton, had some great successes, and also know what I won’t do again!
Beware the up and to the right arrow chart….
Having now been involved in both turn arounds and higher growth businesses as part of my most recent chapter – I have come to appreciate the danger with the ‘up and to the right’ arrow chart. You know the one I’m talking about that is in every deck (and typically even every board deck)! All start ups have it.
And don’t get me wrong – big aspirations are important. In fact, in an early stage business the vision of the future potential can be one of the most important driving forces. A founder must always believe in the steep incline shown on that chart – even when others might lose faith.
However, as it relates to operating one of these businesses, I have seen how this one chart and the behaviors it can drive will oftentimes lead to a chart that would never be found in such a deck. It’s the chart that can have the dreaded arrow that may not point so steeply to the right or worse, is flat or pointing down. Yet I have also learned how this chart can live in harmony with day to day operating as long as you stay grounded in the business and don’t fall for the most common pitfalls that I have seen first-hand:
Losing the sense of urgency with early success and high growth. It is easy to understand how this can happen as the early days in these businesses are so intense. As the product gains market traction and the growth curve is strong, it is easy to take a breath and feel like it should be smooth sailing. But the market does not sit still, and the sense of urgency must always be present regardless of the stage of business. Every business, especially at this phase, should be run like a turnaround where tough calls still need to be made and problems still need to be dealt with – with urgency.
High growth topline projections justify over-spending. Hiring too quickly is one of the most common ways this plays out. Or leasing too much real estate (mostly an issue before Covid!). And just generally spending money without the same scrutiny as should always be applied regardless of the revenue trajectory.
The steep arrow incline drives flawed decisions for short term gain with long term consequences. For example, buying assets rather than building them when building can create longer term, sustainable value but buying them gets you there faster. Or purchasing inventory against unrealistic revenue projections which leads to many downstream issues and unnecessary costs and discounting to move over-stocked product.
The up and to the right arrow chart is not the problem. It would not be a start up without it - without the audacity to believe it will happen. And by keeping these things in mind, the business (and the arrow chart!) can truly achieve it’s potential.
