Are you taking the right approach to investing in growth?
Financing a program of New Growth Platforms is a careful balancing act. Too little funding and you starve the initiative or miss the window. Too much funding and you waste resources and take the edge off. NextVista can help you determine the right balance.
Finding the Right Investment Balance
Companies often try to project a cash flow stream for an important new growth business based on overly detailed analyses of markets that do not yet even exist, and then calculate a Discounted Cash Flow (or Net Present Value) against a baseline that implicitly assumes everything will continue as is, absent the investment in the innovative new venture. More often, the result of not investing in potentially transformational growth initiatives is gradual decay of the base business. This more likely decay trajectory is the more appropriate base case for financial comparison purposes.
Typical New Growth Platform funding issues/challenges include:
- Short term financial performance pressure relative to the long term; more uncertain payoff of major new growth initiatives
- Risk/return profile of disruptive, potentially transformational innovations higher than sustaining innovations in the core
- Initiatives that don’t fit well within an annual budgeting process
- Excessive management progress reviews and stage gates
- Most spending on major organic growth initiatives reported as P&L, rather than balance sheet dollars under current financial reporting regulations
- Management systems and metrics more geared to a stable, mature core businesses than an exploration of a highly innovative and promising—but uncertain—new initiative, with incentives therefore mismatched
- Attitude from top management that the business builders need to “earn the right to grow,” rather than recognizing the need to grow and finding the right team and the right resources to make it happen
Some useful financial approaches include:
- Cultivating a PE/VC mindset, potentially even hiring experienced people from PE/VC firms
- Corporately managing the pool of funding with a protected long term commitment
- Employing external financial expertise, and sometimes even external funding
- Establishing financing criteria and metrics, but
- Using balanced judgment, based on experience
- Evaluating learning, rather than short term business results
- Persisting, and working around the challenges
- Sometimes killing initiatives when they no longer appear to be viable