No Pain, No Gain: Finding the Right Balance Between Short and Long Term Business Investments
Most entrepreneurs believe they can’t fail. That thought simply doesn’t serve the scrappy startup mentality that propels so many of us forward. Yet more than 80% of new businesses don’t make it past their first five years. Sure, there are obvious reasons startups fail —unclear product vision, lack of market need, team dysfunction, and bleeding edge competition are some of the most common — but, one of the most insidious reasons new businesses struggle is simply due to poor planning. Investing too much in short term gains and neglecting your long term business plan is a surefire way to miss that five year mark. And it happens all the time.
Be ready for the cooling period …
Some of the best ideas come out of the gate strong. Your shiny new product is meeting a clear consumer need and you’re generating a lot of buzz (read: investments and early adopters). While this market response is a good predictor for success, it doesn’t give you accurate insight into what type of cash flow to expect. Focusing too much on the short-term influx of early adopters, or forecasting based on your first few rounds of sales, causes many new CEOs and business owners to underestimate the natural cooling period your product will experience as the market catches up to the initial excitement of early investments and your profits normalize. While it’s important to celebrate your first wave of successes, don’t be tempted to burn through the organization’s liquidity and put operations at risk until you have a measurable and consistent revenue stream. Put at least 20 – 30 percent of all profits into long-term investment vehicles so you have something to fall back on should you need it.
A dollar invested today is worth more tomorrow …
It’s especially important to put a percentage of your profits into savings because your money is simply worth more if you let it grow. While I would never advocate for a startup to leverage too much credit debt to get off the ground, you can stretch your capital investments longer or squeeze more out of your early wins if you withhold some cash from yourself. You can also delay front-loading big purchases that you may decide you don’t need after you scale for growth, test your business plan and experiment with your operational foundation. In business, we never know what the next week, quarter or year will bring so it’s better to plan for the worst than experience it. You can go from hero to zero in the blink of an eye — even if you are the next Mark Zuckerberg. Your short term gains will get you off the ground, but it’s your enduring ability to deliver consistent, high-quality products that will ensure your long-term success (and survival). And that can only happen if you balance your short term spending needs against what you think you’ll need to deliver your five and ten year business goals, and then have the discipline to plan for those investments.
You don’t know what you don’t know …
Planning to deliver those blue sky ideas is challenging because you can’t know every single thing that you will need as your business grows and changes. The saying is true: you just don’t know what you don’t know. However, you can know that your sleepless, dogged talent, early management structure and compensation, portable office space, and resources aren’t necessarily scalable if you are aiming for massive growth (and we hope you are). I get it: to make a new idea successful, you have to absorb a certain amount of initial risk to build a rock-star team that will serve as the foundation for your business’s future … just make sure you have enough money left over to begin building a scalable business model as you grow. It’s safe to assume that your needs will also grow in correlation to your success because that other saying is true, too: more money, more problems.
Be unreasonably aspirational in what you want from your startup, embrace risky ideas and challenge every new assumption. The only place to be conservative is in your finances as you determine the sweet spot of early investments and mature spending.
Miami entrepreneur, Burton Katz, is the majority shareholder of a high-growth internet start-up company that focuses on content, data and commerce. Having developed, managed and operated over 200 websites, Katz has created a network of web properties across many verticals. He has achieved success by building a scalable Customer Acquisition and Data Monetization Platform, that has efficiently turned high-volume transactional clicks into lifetime value customers. Katz has also pioneered the development of extensive publisher relationships within the burgeoning territory of content marketing and contextual commerce. The company currently acquires 30,000 new consumer records each day, across it’s owned and operated websites.