XYZ Corp. vs ABC Inc. are two companies that take different approaches to how they view their cash flow.
In my first day of finance class in 1996, the professor declared: “the role of the financial manager is to maximize shareholder value.” At that moment, I knew I probably wasn’t going to go on to become a financial manager, but admittedly, right or wrong, that edict stuck with me. Meanwhile, in marketing, we’d study the product/company life-cycle. I recreated this quickly by blending the personal, product and company life cycles because to understand how one avoids the decline stage, you cannot examine the tiers apart.
It’s always a balance between “Fear” and “Greed”
Precisely twenty years later in 2016, after life had navigated me away from a corporate gig towards entrepreneurs, I found myself at a fork in the road. The business had survived long enough to thrive, celebrating its tenth year anniversary in 2016 when we embarked on WM2020: a series of initiatives we felt represented growth areas and would turn into real revenue streams in 2020 (I’ll expand on the initiatives at a later date). One thing everyone – entrepreneur or executive, startup or corporation, private or public – needs to decide is whether or not to re-invest in the business.
A CEO’s job is the allocation resources and prioritizing. We had a solid 2020, which was bittersweet because of what surrounds us. Our results weren’t a outcome only of Covid’s impact, but due to some of the bets we made then. It was risky, hard, and in some ways traumatic. But, it paid off. To help you figure out what makes sense for you, I am sharing my insights and lessons. The numbers, trends, timeline, inflection points etc. below are fairly randomized and chosen to show scale and accentuate my points better visually and not representative of the company’s actual operating history.
A tale of two firms: XYZ Corp. and ABC Inc.
Most companies “milk the cow” & don’t reinvest: XYZ Corp. After the initial investment years, XYZ breaks-even in year 4… then goes on to earn profits. Things couldn’t be better (or so they thought), until they notice some softening of revenues by year 8 with profits (yellow) flattening as costs continued to rise. In of itself, not fatal. But an omen.
Whether driven by “fear” or “greed,” it’s easy to be tempted to simply “milk the cow” and not reinvest.
The result is declining revenues and eventual losses
Eventually, under-investment means existing product lines mature as competition increases and revenues flatten out. Not having invested means a largely fixed cost base which may not support declining revenues, pushing the XYZ Corp. back into the red. WatchMojo’s been fortunate to remain the black since 2012, but that was because I was realistic to note that things don’t always go upwards and to the right and needed to invest before we “needed” to. The best leaders are thinking of investment areas 1, 3, 5, 10 years out. I’m not smart enough to know which exacts bets to make, so I’m humble enough to know I need to make several bets.
At XYZ, panic ensues. It tries to cut costs back to profits, tailspins. RIP XYZ Corp.
Companies that stand the test of time reinvest: ABC Inc.
ABC Inc. largely has the same early years as XYZ Corp. But by year 9, ABC Inc. reinvests, increasing costs and therefore pressuring profits (yellow).
This is a tough decision just to propose let alone initiate due to corporate politics, culture, resistance from many key stakeholders. Most will give up here; many go on to experience PTSD.
That’s just to get to launch. Things took longer, expenses got out of hand. Revenue forecasts don’t seem as realistic as predicted. Oh, half of your competitors have similar initiatives ranging from “lame, but could be dangerous,” to “f&ck, we have to rush that out.”
Once launched, many employees question the decision. The press wonders if the effort will pay off. Executives second-guess one another, who need to be open-minded yet demonstrate mental resilience, balancing optionality with conviction.
For private companies, you start to doubt yourself. You thought you were worth $X, but suddenly, you’re worth less. People question you. I’ve gone from being ridiculed, to hailed, to laughed at, to praised, to… you get it.
For publicly traded companies, it can mean the stock either i) tumbles, or ii) actually rises in price depending on the industry, competition, multiples and whether it’s deemed a growth/value stock.
Some of the bets will pay off, many won’t. It’s harder to bring in a dollar in revenue than it is for a dollar in cost to walk out the door. Before you even blink, your margins are compressed.
Paradox of Feedback
To maintain a spirit of collaboration, surface the best ideas and truly model out possible scenarios, I generally take in as much feedback as possible and sincerely believe the best idea can come from anywhere. It’s great in theory, but in practice has its limitations. But eventually, you must decide and act, and that means you can’t listen to everyone. Thus, by being so open to ideas, you may come across as the opposite.
Because the scale and scope of WM2020 was considerable, I faced a lot of resistance and criticism throughout from all corners. Boohoo! We all face that. It’s a part of life. Much of it stemmed from people’s lack of experience, lack of information, and perspective. While some of it was unfair, there’s validity in everything to some extent.
In most cultures, whenever people speak up, there’s some kind of settling of scores. That is how organizations become political. We’ve avoided politics and I’ve developed a considerable threshold for pain and temperament.
Having a Thick Skin
A few years ago, one of my advisors Ted Prince introduced me to Lance Conn, who was Microsoft co-founder Paul Allen’s lieutenant at Vulcan. Lance was interested in joining us as executive chairman (his “dream job” – not too shabby).
One morning I woke up to somewhat unfair criticism (which turned out to be incorrect, I’ll add). We had developed a great rapport by then (and still stay in touch), but those where the moments I knew I could trust someone: when they could give me tough, direct talk. He also used humor, but it was a low-blow kind of comment (which he acknowledged). I didn’t care. I stripped the shade and focused on the substance.
It’s about balance: my Nature led me to respect everyone’s feedback, and the reality is, that doesn’t make sense in the real world because effective forces are not run that way, plain and simple. Utopias were great in my dreams, but when you’re at work, you have to acknowledge that reality and be a tough and decisive leader, instead of wanting to believe that “anybody can do anything.” To be clear, no one is better than others; you need a team made up of all strata to win, but each one’s role and de facto veto right has to be put into context of experience, skill, access to information, etc.
As I didn’t have a traditional board (which I earnestly now realize may have helped), I viewed the collective group of stakeholders – the WatchMojo community, my employees, partners, fellow executives and so on – as my board. I sincerely believe that a 21-year old (paid) intern could have a more pertinent insight than anyone else. Indeed, some things some people say are legitimately valuable and correct, but not everything everyone says is going to make sense. P&G’s John Pepper was a highly respected and liked executive who replaced John Smale, known as the Prince of Darkness. Pepper’s tenure was short-lived, because he was too nice, and agreed with the last person he spoke to.
It was me that had to change, once I realized everyone is managing the seven sin and virtues – themes that come up frequently in my universe.
The Golden Rule
As side note: eventually, I added Chairman to my CEO titles to signal to my team that I was more of an Executive Chairman and viewed them as commanders of their own units in the broader army. Christine, in effect, was the chairwoman. Christine was my partner from day 1 so she was once we launched fully on board, but unless your spouse supports you as an entrepreneur, you’re not going to make it past Infancy, let alone get to those Growth years. I could write a novel on the insane amount of sexism women face in the business.
Ultimately, you want to surround yourself with the best complementary people who can communicate effectively and control their own sins and channel them into virtues. Those people support you (and you support them) but they more importantly remind you to wear your seatbelt, slow down before you take that turn, avoid oncoming cars or driving off a cliff. Oftentimes, it’s just a question of knowing you have a handbrake to use if need be.
Companies that stand the test of time reinvest
They fail either because they picked the wrong strategies, initiatives or simply could not execute. But since the mission of Context is King is to bring together the psychological aspects of business & touch on entrepreneurs’ struggle with balance, I finally had the “eureka” moment to write this by framing it in the context of sins and virtues. Companies and people fail because of:
- LUST: Driven by sex, money or power? When it involves the latter, scandals will invariably bring down projects when the people steering them are taken down. If it’s money or power, all I will say is that money and power need to be a by-product of your journey. I’ve studied a lot of successful people and none of them are singularly focused on money or power.
- GLUTTONY: Spent too much money, too fast… once they wanted to scale back, morale is hurt.
- GREED: Acted selfishly in partnerships with the vendors, suppliers & distributor AND people one needs to excel in business, in win-win frameworks. Nothing is ever 50-50, but it has to make sense.
- SLOTH: Waited too long or was slow in acting.
- WRATH: It’s a matter of when, not if, you have a disagreement or impasse… how you resolve that determines your ability to succeed.
- ENVY: Fuelled by envy chasing fads instead of focusing on their comparative advantage and in areas where they could achieve a positive outcome.
- PRIDE: Suffered from hubris, which manifests in many ways, including the belief you are better than others and have a sense of entitlement. No one owes you anything in life and you should never take anything for granted.
Impossible, you say? But for the few whose strategy & execution are well planned-out and implemented, ideally the positive initiatives offset the negative ones, the company streamlines the cost base and experiences a return to top-line growth with new revenue streams. In theory, ideally ABC Inc.’s profits can also grow over time, instead of merely maintain. Realistically, you should always be re-investing but also recalibrating projects.
Again: the trends, timeline, inflection points etc. are fairly random and accentuated to illustrate my points better visually and not our company’s actual data.
How to Create Value
XYZ milked the cow, presumed past results guaranteed future performance. ABC, meanwhile re-invested and saw revenues bounce back. The delta between them grows over time.
Moreover, if you’re ABC, you see that the investment you made (captured in RED triangle) – painful was it was then (& much vilified by some) – paid off eventually on your P&L, in droves. Mainly, those investments spawn revenue streams – in much larger GREEN triangle – that would not have otherwise existed without the tough decisions to re-invest and not milk the cow (and that’s why venerable investment bank Lazard Frères referred to as “being long term greedy”).
Courage. Conviction. Confidence
And, if you remove the investment in years 9-11 and smoothen out the cost trajectory, you find yourselves where your costs may have always been in year 13 on an organic basis as the company matures, retention of your top employees leads to higher salaries, which may be offset by gains in technology, acquisitions and the ability to iterate, innovate and expand. Thus, thanks to re-investing and not despite it, your profits also get their mojo back.
The Value of Education and Experience
I am so grateful for the education I received. Some are great operators, others are great financiers. I may be more of a jack-of-all-trades-master-of-none, but ultimately decent enough at both that it’s helped me create value by focusing on content that commands value. To achieve that, you need:
- The Right Programming
- Strong IP
- Coveted by distributors and licensees
- Brand safe
- With the Right Margins
- Commanding the Right P/E Multiples
Multiply the annual revenue stream by your price-to-sales (P/S) or price-earnings (P/E) ratio your market’s comparables command. For purposes of illustration, say:
- you invested $1M and grew your costs
- your revenues then led to an average of $3M annual uptick,
- you command a 5X P/S ratio,
- effectively that $1M investment led to an increase of $15M – or 5 x $3M – in your valuation.
This is over-simplifyng things and ignores timelines, and may seems obvious and easy on paper, I assure you pulling it off is hard, especially if you have my disposition.
When trying to pull off this feat, an operator should not ignore the critics outright, because there’s always some truth and validity to any criticism, no matter how petty it may come across. But you cannot, by the same token, go to the other extreme and listen too much to everyone with an opinion. I’ve always told people to block out your biggest critic and fan, as neither is necessarily accurate. The key is balance.
That’s the paradox of feedback.
You’ve Made It! We’re almost done!
Granted, I’ll admit that “maximizing valuation” isn’t exactly what drives me most, but if you are an entrepreneur these days, you absolutely need to be aware of these dynamics and levers.
That said, if you are competitive and perform in this universe, you do care about how people value your business even if you’re not driven by money itself; the valuation is more a gauge of “keeping score.” In that vein, I will say this: it’s quite hard to build the value of your business to a given level, it’s incredibly harder to get it back to that level, let alone surpass it, if / when you have invested and thus incurred growing costs which affected your profitability.
What Does It Truly Take To Succeed in a Competitive World Where People Spend So Much Time Together?
I wanted to cover this topic for a while, but wasn’t that passionate to do so through the lens of simple P&L analysis or marketing jargon. This is as much about channeling emotions and feelings, managing thoughts, words, deeds and actions. It’s about humanity’s nonstop resistance to the forces of evil. We’re born good, I suppose. How do you prevent your heart to go evil and mind dark?
To heal every wound, I strengthened my Principles but adapted my Tactics. I changed my pace and build up stronger defensive mechanisms. I had to, since I was concurrently shielding WatchMojo from those abusing Content ID. That was no excuse, but it added to the stress. Ultimately, it’s the “continuous improvement” equivalent that captures the struggle in your mind, soul and heart. You have to stay true to your core beliefs.
If I flip the script and look at our success measures through the Virtues:
- CHASTITY: In 2006, investors weren’t merely balking at funding content companies, they also didn’t love husband and wife founder duos. But one benefit of having a couple nurture the environment early on is the office doesn’t turn into a locker room.
Thus for many reasons, we were blessed to avoid experiencing MeToo episodes. I’ve always fought for the underdog, so if I even sensed any possibility of impropriety amongst the troops, I would have addressed it swiftly. Too many executives and entrepreneurs don’t. How you handle these situations are key tenets of success. But this also explains why the company remained small. Maintaining such an environment becomes more challenging as you grow. But if you can accomplish it, it is much easier it is to recruit talent and retain them.
- TEMPERANCE: Our success boils to wanting to serve others. Practically in business this means asking yourself how the counter-party or other person would feel or react when you present them your perspective. I’m always focused on how the staff would receive news and changes. Empathy and humanity are not liabilities, they can be turned into assets (loyalty & reputation).
- CHARITY: in addition to the obvious iterations of charity, entrepreneurs at their core lead by example and would not ask their team to do something they wouldn’t do themselves, sacrificing as they need be (I am not complaining, I had savings from “previous glory” in the words of fellow investor John Stokes, but the fact remains, I didn’t really collect a salary from 2006 to 2011 while mortgaging our place to avoid layoffs). But more critically, the instant we turned a profit, we implemented a profit-sharing plan with all employees. Given our Field of Dreams editorial approach and platform-centric revenue model (i.e. YouTube’s AdSense), it was anchored around the editorial team. Even in our intense investment years when revenue growth stalled while costs soared and profits tumbled, we kept bumping salaries up aggressively as we were profitable after all and could see which initiatives would be sustainable and which ones wouldn’t. Naturally, as some projects didn’t take off, people left. I hated losing people, but I’d be lying if I said I wasn’t also relieved. My “people before profit” mindset prevented me from mimicking our larger peers and doing layoffs – I was perfectly happy with a bit less profitability, hoping the initiative would find platform/format fit. That said, not buying into “hire slow, fire fast” was a mistake. Montreal’s job market and affordable cost was in our favor from a demand / supply dynamic but we never exploited it:
– early on offering full-time salaries with health benefits and paid vacation even though the industry trend was toward freelance model;
– offering paid internships to students, many of whom went on to grow into manager roles over the years (before society and industry woke up to realize that the unpaid internships were not exactly fair or ethical);
– hiring aggressively through a paid apprenticeship program for young graduates with little experience, whom we could invest and train in before determining culture fit and whether they wanted to pursue an office job. Instead of hiring 1-2 people, we hired 20+ in 2017-18! We didn’t hire youth to have them get us lunch, we hired people and gave them a platform; but as Jack Welch would say, not everyone has the runway or drive. After all, we were largely recruiting aspiring creatives and/or fans of pop culture, and not engineers or accountants.
The fact of the matter is we probably hired more English communications, media, journalism students than The Montreal Gazette, CBC, etc. combined. But because of our deficit-financed, we were hiring & incurring costs with no real revenue behind those initiatives. This meant losses on those unit’s P&Ls with no guarantee of any path to revenues, let alone profitability. I acknowledged that we could wait six years to break-even on WatchMojo, but didn’t have the same luxury now because our opportunity cost was higher. As I wasn’t comfortable spending other people’s money, we were effectively drawing from the core product’s profits and thus had to be conservative, especially given how unproven many of the recruits were. I do acknowledge, however, that to a 21-year old I’d hired in 2017, the financial sacrifices I made from 2006-11 and legal spectre thereafter were unrelated to them because I’d largely sheltered anyone from the struggles on the field and in my mind. We also hired at the high end of the experience spectrum, but that’s for a #FutureArticle.
The system worked and all came together in 2020, but admittedly, I could have communicated my method to the madness better and been less “Taarof-ey.”
This year we issued record compensation to the team, who earned it and then some.
- DILIGENCE: Persistence and Effort. Playing soccer taught me so much about management and leadership: i) working with characters, ii) team work vs selfish players, ii) finishing your play, iv) being accountable, v) ethical fair play. I also realized how one player could be the difference between wins and losses, but one bad apple could make it impossible to win.
- PATIENCE: I am fiery, passionate and competitive. But I’ll never get mad at people, I get upset at outcomes and yes, occasionally someone “has to do the yelling” and firing up the troops. You also do that to then create a ripple effect where other leaders – some silent, others more vocal – emerge. Sounds crazy but I like it when people interrupt me (sometimes), and I only interrupt people on two occasions (which ones? another article). That said, it doesn’t mean you love losing your temper. No one does. Yelling is the management version of Michael Jordan’s “I succeed every day because I fail every day.” However, over time, people definitely nuance that it’s not the “player” that’s being yelled at personally and instead the focus having been on the “play” or “outcome.” Being based in Montreal, I always cited the fact that I had a team of nice Canadians as a double-edged sword. I wouldn’t trade them for anything, though. The people you can build championship teams with know and understand the difference. Trust me, it’s not like my best team mates have never yelled at me. It’s part of this racket, but if it’s too frequent, it not only gets stale, but also loses effect. Balance!
- KINDNESS: Taarof is both the best and worst behavior from my roots. The only thing that ever truly disappoint and thus angered me were instances of wasted i) opportunity and ii) resources. Why? Having been given so few opportunities as a young professional and then subsequently been so strapped for money, I felt it an obligation to create as many opportunities for others as quickly as possible. I may have overdone this by hiring way too many people, too quickly. I learned some painful and heartbreaking lessons, where now I understand that I, too, need to sometimes pause. Going forward, seeing some of the efforts by Mr Beast or Dave Portnoy makes you wonder about how you can manage your time and energy and focus on impact, than just sheer volume of hires and so on. I don’t need the biggest army, I need the right one. You don’t need to penetrate through all fronts, you need to move into the right direction.
- HUMILITY: You must possess and display bravery and reverence to win. Granted, I acknowledge that dedicating a whole article let alone website to my experiences in life will not come across as very humble or modest. Two counter-points:
- I’m an eternal student who’s always learning. Researching and writing are foundations of learning and education, which is our mission in life.
- I’ve made many mistakes, but by understanding that facts and figures are part of the equation and people’s emotions and feelings come into play, we were able to steer through and persevere.
The truth of the matter is, our success is the result of a collective, naturally that meant some conflict. But thanks to our communications and culture, we contained the sins and were guided by a more virtuous path to a better outcome.