Most everyone in business has been indoctrinated with an emphasis on the bottom line. Ingrained in the psyche of corporate America is the demand, “Show me the money.” If a public company misses analysts’ profit estimates, its stock is summarily trashed, and the investment community sometimes even calls for the CEO’s head.
In business we’re reminded every day that public companies’ chieftains are paid the big bucks for bottom line performance, not perspiration. Their brethren in the private sector are instilled with this same mindset.
There are exceptions. Creating value is not always about generating immediate profitability. Recognize either of these names: Tesla Motors and Twitter, just to name a few? These two companies, as an example, simply don’t make a dime in profits, yet their stocks have performed better than their most well-endowed, bottom-line counterparts.
Why? Because they’re building something for tomorrow. They sacrifice short-term profitability for innovation and market share. They’ve captured investors’ imaginations of what might be, not what is.
The value of the trade-off
How should privately held small-, medium- and even large-sized businesses look at the trade-off between profitability and investing heavily on the “if come?”
The quick answer is that it depends on the industry, the products or services, as well as the depth of the private company’s pockets. Forget about traditional banks as a source of funding for the unprofitable business, unless the owners want to personally guarantee a bank loan. The reality is banks take a dim view of companies that lose money. Banks need certainty, which includes a high degree of strong assurance that the borrower will more than likely pay them back at the prescribed time.
There are a number of alternatives for these budding companies that are pushing the boundaries to make it big, but whose founders were not fortunate enough to have been born with that proverbial silver spoon to feed their passion. These include big and small private equity/venture capital firms, which have the money, mindset and stomach to take chances on the unknown. Some are relatively conservative while others are always ready to double down based on instinct and experience.
Many companies are not of the right size, or don’t have the sizzle or just may not know how to package their story to attract traditional private equity. There are always wealthy angel-type investors, however, who have already made their big money and want to do it again vicariously on someone else’s sweat and tears, or because they just like being in the game.
Take heart; be strong
No matter which type of investor a company chooses to romance, the cornerstone of getting the needed capital is understanding the old cliché that “Money talks and … Oh well, the other stuff walks.” Companies must be weary of wasting their time on the later. So what’s an entrepreneur to do?
Colors can paint different pictures. Take the smash hit TV series last year titled “Orange is the New Black,” about a gal who finds herself in a women’s prison wearing the ubiquitous orange jumpsuit.
Marketing yourself as the company for which “red is the new black” and attracting necessary capital takes a strong stomach and no fear of rejection. Most importantly, you need a decent idea with a practiced ability to deliver a compelling pitch to sell it, backed by thoughtfully researched assumptions.
Never forget, however, that just like the tagline in the oil filter TV commercial, when you take OPM, aka “other people’s money,” you have to either “pay them now or pay them later” regardless of how you color your story. ●
Feuer serves on a number of corporate and philanthropic boards and is a frequent speaker on business, marketing and building entrepreneurial enterprises. “The Benevolent Dictator,” a book by Feuer that chronicles his step-by-step strategy to build business and create wealth, published by John Wiley & Sons, is now available.