I was (re)reading How Will You Measure Your Life by Clay Christensen, and a passage was so perfectly written, I thought I’d share it here.
A Theory of Good and Bad Capital
At a basic level, there are two goals investors have when they put money into a company: growth and profitability. Neither is easy. Professor Amar Bhide showed in his Origin and Evolution of New Business that 93 percent of all companies that ultimately become successful had to abandon their original strategy—because the original plan proved not to be viable. In other words, successful companies don’t succeed because they have the right strategy at the beginning; but rather, because they have money left over after the original strategy fails, so that they can pivot and try another approach. Most of those that fail, in contrast, spend all their money on their original strategy—which is usually wrong.
“The theory of good money and bad money essentially frames Bhide’s work as a simple assertion. When the winning strategy is not yet clear in the initial stages of a new business, good money from investors needs to be patient for growth but impatient for profit. It demands that a new company figures out a viable strategy as fast as and with as little investment as possible—so that the entrepreneurs don’t spend a lot of money in pursuit of the wrong strategy. Given that 93 percent of companies that ended up being successful had to change their initial strategy, any capital that demands that the early company become very big, very fast, will almost always drive the business off a cliff instead. A big company will burn through money much faster, and a big organization is much harder to change than a small one. Motorola learned this lesson with Iridium.”
“That is why capital that seeks growth before profits is bad capital.”
“But the reason why both types of capital appear in the name of the theory is that once a viable strategy has been found, investors need to change what they seek—they should become impatient for growth and patient for profit. Once a profitable and viable way forward has been discovered—success now depends on scaling out this model.”
Excerpt From: Christensen, Clayton M. “How Will You Measure Your Life?”
This is very much in line with the Awake philosophy and approach to building companies. Awake starts with a profitable transaction, and scales those. In other words, one can not make money scaling up money losing transactions, and expect to make it up in volume.
Technology businesses are no different, they are just faster at making (or losing!) money. It is incredibly important that we get to gross profitability ASAP, there is no other metric that makes a business an actual going concern.
This is true with brands, a lot of folks try to launch what they feel is their story, and hope that it sticks. Stories are important, but value is what is being described, so there better be some.
A successful business can be scale very quickly if there is value, and you’re willing to share to scale. Then it becomes a question of sure, one can go far alone, but one can go very, very far together. Step 1, figure out a profitable transaction, step 2, share the story and scale the wealth co-creation.
So just like Clay Christiansen described bad capital and good capital, we can talk about good business, and bad business. Awake enables the data-driven blitzscaling of Good Business. 🚀