What is the purpose of this article?
To provide a framework to think about how to grow your company’s value. This article is not intended to outline a specific action plan. You will have to determine the action plan specific to your company’s unique situation.
You can download a PDF of this article from: How do your grow your company’s value V2
What stage is the company at?
What you do to grow your company’s value depends upon what stage your company is at.
A startup is a temporary organization designed to search out a repeatable, scalable, and profitable business model with lots of potential customers who are willing and able to pay to solve their problems and needs.
Startups are not building a solution. They are building a tool to learn what solution to build.
The startup stage concludes with having found a repeatable, scalable, and profitable business model with lots of potential customers who might be willing and able to pay to solve their problems and needs. There are cash paying customers who are delighted by all their interactions with the startup.
Starting with day one and throughout the startup stage, the founders are constantly engaging potential and actual customers to understand their problems and need.
- Some of the steps include:
- Identify overall size of potential customers.
- Identify a critical subset of the problems and needs which a subset of the overall customers would be willing and able to pay for.
- Creating a visualization of what the subset customer would see;
- Gain customer feedback to validate critical assumptions;
- A prototype of the critical assumptions is used to obtain further customer validation;
- Non-cash paying customers validate a pilot which has all components of a customer interaction related to solving a critical subset of their overall problems and needs;
- The pilot evolves to include cash paying customers;
- Further evolution continues until the startup has the potential to profitably solve problems for a large number of potential cash paying customers.
- At this point, the focus is business development to reach those potential customers.
- Cash flow and profits will be negative, due to large short-term customer acquisition costs while profits will occur over the lifetime of the customer.
Mature – high return on capital
- Growth has slowed.
- Cash flow and profits are very positive.
- Ongoing deep customer understanding continues to drive innovation to meet evolving customer needs and beat the competition.
Mature – unrecognized decline – little or no value creation
- McKinsey analyzed the world’s 2,393 largest corporations from 2010 to 2014. The top 20% generated 158% of the total economic profit (i.e. profit after cost of capital) created by those corporations. This was an average economic profit of $1,426 million per year. The middle 60% generated little economic profit, an average of $47 million per year. The bottom 20% all generated negative economic profit, with an average loss of $670 million per year.1
- Less than 13% of global companies had sustained value creation in the 1990s.2
- 12% of public companies had sustained value creation from 2002 to 2012.3
- Of the approximately 25,300 U.S. publicly traded companies from 1926 to 2016: the best performing 4% accounted for all of the net stock market gain with the other 96% as a whole matching 1 month T-bill rates; more than half the of the stocks had negative lifetime returns.4
Extinction – Few public companies survive for long
The median time that a stock was public between 1926 and 2016 was 7.5 years. 5
Global public companies with $250 million+ market cap have a typical half-life of 10 years.6
What is value?
The members of the company’s ecosystem may have different measure and targets regarding value. E.g.
- Customers: meeting emotional needs? Saving time? Saving money?
- C-Suite: All aspects of compensation?
- Employees: compensation? Alignment with employees values and life purpose?
- Shareholders: share price? Dividends?
- Society: reducing impact on climate? Retraining employees? Reducing environment impact?
- Local community: improving the community? Providing employment? Reducing environment impact?
What ultimately drives value
- Solving problems which large number of cash-paying customers are willing and able to pay for. For example, Blackberry declined when cash paying customers found that touch screens and apps were more valuable than key boards.
- The ultimate driver of value is the company’s talent. In today’s world, capital is unlimited but talent remains scarce. There are two type of rare talent.
- First are the people who can constantly learn and unlearn, execute their learnings and stop executing their unlearnings. The most critical learning is the never-ending deep understanding of customers and their problems.
- The second rare talent are those people who are able to assess and develop talent. For example, there are many athletes in the world but few make it to the Olympics and very few win medals. There are many coaches in the world but there are few coaches of Olympic winning medal athletes. There is a huge difference between the medal winners and their coaches. Coaches are rarely great athletes and great athletes are rarely coaches. Success requires both sets of talent.
- Value destruction occurs when there is the wrong talent in the room (or on the video calls).
- Growing the value of the company requires growing the number of customers. Depending upon your situation, you may focus on customers who are profitable in the short term or longer term.
Your next steps
- Identify what stage your company is at and what is the next stage. What are the facts? What assumptions do you need to validate or invalidate?
- Understand how the members of your company’s ecosystem who are critical to your success perceive your company relative to the competition. Understand how your customers perceive your company relative to the competition.
- What are the root causes of your current situation? Be specific on what characteristics of leadership talent (e.g. founders, board of directors, CEO, C-Suite) have led to the current situation.
- What are the characteristics of the leadership talent needed for future success? Compare the required future talent capabilities with the capabilities of your existing talent. If your company has done well, it may still not have the talent required for the future. If your company has not done well, then clearly there is a talent issue.
- Assess whether the existing leadership talent is coachable, able to transform itself, learn critical new things, and unlearn obsolete knowledge. If the leadership talent is not coachable, then they will need to be replaced.
- Once your have the right talent in place, they can determine the execution plan specific to your company.
1 Chris Bradley, Martin Hirt, and Sven Smit, “Strategy to beat the odds”, McKinsey Quarterly February 2018, https://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/strategy-to-beat-the-odds
2 Chris Zook, with James Allen, Profit from the Core, (Harvard Business Review Press, 2010) Page 11
3 Christoph Loos, CEO Hilti Group, Swiss AmCham Luncheon, September 1, 2015. Analysis based on about 2,000 public companies in 2002 with revenues greater than $500 million.
4 Hendrik Bessembinder, “Do stocks outperform treasury bills?”, Arizona State University, W.P. Carey School of Business, Page 6
5 Hendrik Bessembinder, “Do stocks outperform treasury bills?”, Arizona State University, W.P. Carey School of Business, Page 2
6 “Corporate Longevity”, Credit Suisse, February 7, 2017
Do you understand your customers?
How do you interview potential customers?
What is a value proposition?