There is a book – “The Startup J-Curve” by Howard Love, that is recommended reading for every businessman or anyone going into business.
In the book the author likens the path from start up to success using a J-Curve.
On start up most businesses go into “The valley of death” – the downward swoop of the j-curve, where revenues if any, are eaten by start up costs and is where most businesses flounder and die. One reason many business die here is because before their business model has ben shown to work, they are off investing in other things which prove a constant drain on much needed resources giving the initial enterprise a chance to survive.
When the business hits break even – on the other end of the curve opposite the beginning of the J, it is assumed the business model is workable and the businessman starts more than covering his costs, he is profitable and cash starts to flow. It is critical as a business that you recognise this point to prevent you from making questionable investment decisions before it.
I imagine the relief of surviving the valley of death and the excitement of the money flowing in does a lot of damage to businessmen’s brain. Because it is at this point that they start showing off or investing in questionable endeavours that soon lead to the company’s demise.
The other day I saw a financial services business, that is cash rich – high equity and little debt. They have now branched out of financial services into car washing, restaurant business and are actively looking further afield.
A lot of money does that to people, even the brightest of us.
Compare and contrast this with another business which sold out a few years ago, making its owners millions of US dollars richer.
This business too went through its valley of death, when they came out the other side they didn’t try to be clever they invested in the same business, expanding their production at first before vertically integrating their own value chain – animal breeding, pesticides, feeds and meat processing. They did not stray out of their circle of competence.
Billionaire investor
Warren Buffett advises that you need not only know your core competence but even more important, the limits of that competence.
So for instance if your business is stationary, when you emerge on the other side of the curve you may consider investing in paper making, printing or publishing. It would be full hardy for you to go into the taxi business or food processing, straying far away from your core business or competence.
This mistake is not unique to Ugandan businesses it’s the story behind failures of companies all overt he world.
A businessman friend of mine told me that in fact in some multinationals insist that their subsidiaries are financed by debt, because this instills internal discipline on the management. The banks want to be paid whatever the state of the business so businessmen are keen to control costs.
But when there is too much equity and retained earnings financing the business, this is when the hair brained ideas start jumping out of the wood work.
The shopkeeper opens a garage or the farmer decides to go into commercial real estate or the telephone seller decides to try his hand at the coffee shop business.
Its what money does to us.
So to the financial services company it may be wise to shut down their car wash business and restaurant and expand into hire-purchase, asset leasing and even build up their capacity towards mortgage lending. These are all avenues of expansion that will not cost them much in the learning curve and have a better chance of at least retaining their shareholder’s value.
But we know what it is too. We want to be seen to be making money, we want to look out the window and point at this or that business, this or that building or this or that car as proof that we are making money.
I saw a saying the other day that went, don’t tell other people your problems 80 percent of them don’t care and the other 20 percent are happy you have the problems. For money it can be paraphrased, 80 percent don’t care you are making money and the other 20 percent are resentful of your success. Progress in silence.
The moral of the lesson is that its not about looking like you are making money but making money. There is a big difference.
