Have you ever been at a well-controlled company and heard at a company meeting that the board wants to accelerate the company’s development by “investing in the business”? These days, statements like this send shivers down my back. Why, you ask? Well, in lots of instances it can mean chaos has just been authorized. And sometimes it can signal the beginning of an untimely death spiral for the company. It’s ironic, because in today’s business environment where risk assessment is fundamental, investment in the business is, in many cases, not even considered a risk.
I have seen companies (both public and VC-backed) make the “we are investing in the business” announcement. Within weeks they are recruiting, or changing management, or adding infrastructure like crazy, so they can grow revenues, accelerate product development, scale up, or be in a position to scale when revenues grow. Unfortunately, in nearly all instances they allow basic controls to disappear and they no longer manage their business to the tight set of metrics that they used to get to that point. I find this incredible, but it happens so much. The effect is that after a few months, existing staff feel the company is out of control and leave, and investors get nervous. Company results more often than not tank as the desired revenue growth does not happen as fast as desired—but the expenditures do happen, and cash balances drain at a dramatic rate as the investment takes place.
Eventually, but normally way too late, the board slams on the brakes, and an exercise in picking up the pieces and bringing the company back to normal begins. In some instances, companies need to raise more funds as they have burnt through their cash balances, and they struggle or fail to do so because their metrics are now awful. That means they sell shares at a much lower valuation, get bought out at a much lower valuation, or maybe even go out of business. In nearly all cases, the company and the employees are much worse off than they were in the first place.
This whole cycle is completely avoidable by implementing a few basic controls:
- The decision to invest in the business must have goals attached, and a cost benefit and risk assessment analysis should be performed before the proposed investment is approved.
- The planned investment should be well defined and divided into small sequential segments with milestones. Investment in the next segment should take place only after the previous milestone is met, with positive results.
- If an investment is not working, the board should not be afraid to come to terms with it and change course as soon as possible—not wait until a big problem arises.
- Investment in the business should be secondary to managing the business to key metrics and fundamentals.
Smart, properly controlled investments in the business can be extremely beneficial, but poor or uncontrolled decisions can be disastrous—and everyone pays a price.
How will your company react when those decisions are made? Hopefully they will do it the smart way, or you will probably experience the chaos.
